Is Grand Ming Group Holdings Limited (HKG:1271) a good dividend stock? How would you know? A dividend paying company with growing earnings can be rewarding in the long term. Unfortunately, one common occurrence with dividend companies is for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
Investors might not know much about Grand Ming Group Holdings’s dividend prospects, even though it has been paying dividends for the last five years and offers a 2.4% yield. A 2.4% yield is not inspiring, but the longer payment history has some appeal. Some simple analysis can offer a lot of insight when buying a company for its dividend, and we’ll go through these below.Explore this interactive chart for our latest analysis on Grand Ming Group Holdings!
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. In the last year, Grand Ming Group Holdings paid out 46% of its profit as dividends. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Last year, Grand Ming Group Holdings paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.
Is Grand Ming Group Holdings’s Balance Sheet Risky?As Grand Ming Group Holdings has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks.
A quick way to check a company’s financial situation uses these two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA is a measure of a company’s total debt. Net interest cover measures the ability to meet interest payments on debt. Essentially we check that a) a company does not have too much debt, and b) that it can afford to pay the interest. Grand Ming Group Holdings has net debt of greater than 10x its earnings before interest, tax, depreciation and amortisation (EBITDA), which we think carries substantial risk if earnings aren’t sustainable.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company’s net interest expense. Grand Ming Group Holdings has EBIT of 10.85 times its interest expense, which we think is adequate. Despite a decent level of interest cover, we think that shareholders should remain cautious of the high level of net debt. Rising rates or tighter debt markets have a nasty habit of making fools of highly-indebted dividend stocks.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Grand Ming Group Holdings has been paying a dividend for the past five years. During the past five-year period, the first annual payment was HK$0.041 in 2014, compared to HK$0.12 last year. Dividends per share have grown at approximately 23% per year over this time.
We’re not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.
Dividend Growth Potential
Examining whether the dividend is affordable and stable is important. However, it’s also important to assess if earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient’s purchasing power. Over the past five years, it looks as though Grand Ming Group Holdings’s EPS have declined at around -5.3% a year. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company’s dividend.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. First, we like Grand Ming Group Holdings’s low dividend payout ratio, although we’re a bit concerned that it paid out a substantially higher percentage of its free cash flow. Second, earnings per share have been in decline, and the dividend history is shorter than we’d like. Overall, Grand Ming Group Holdings falls short in several key areas here. Unless the investor has strong grounds for an alternative conclusion, we find it hard to get interested in a dividend stock with these characteristics.
See if management have put their money where their mouth is, by checking insider shareholdings in Grand Ming Group Holdings stock.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.