The board of The Bank of East Asia, Limited (HKG:23) has announced that it will be increasing its dividend by 119% on the 4th of October to HK$0.35. Although the dividend is now higher, the yield is only 4.4%, which is below the industry average.
Bank of East Asia's Dividend Is Well Covered By Earnings
The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. Prior to this announcement, Bank of East Asia's dividend was comfortably covered by both cash flow and earnings. This indicates that a lot of the earnings are being reinvested into the business, with the aim of fueling growth.
The next year is set to see EPS grow by 46.0%. If the dividend continues on this path, the payout ratio could be 37% by next year, which we think can be pretty sustainable going forward.
Although the company has a long dividend history, it has been cut at least once in the last 10 years. The first annual payment during the last 10 years was HK$0.94 in 2011, and the most recent fiscal year payment was HK$0.40. Doing the maths, this is a decline of about 8.2% per year. A company that decreases its dividend over time generally isn't what we are looking for.
Dividend Growth Potential Is Shaky
Given that the track record hasn't been stellar, we really want to see earnings per share growing over time. Bank of East Asia's EPS has fallen by approximately 12% per year during the past five years. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future. On the bright side, earnings are predicted to gain some ground over the next year, but until this turns into a pattern we wouldn't be feeling too comfortable.
Our Thoughts On Bank of East Asia's Dividend
Overall, we always like to see the dividend being raised, but we don't think Bank of East Asia will make a great income stock. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. This company is not in the top tier of income providing stocks.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 1 warning sign for Bank of East Asia that you should be aware of before investing. We have also put together a list of global stocks with a solid dividend.
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