Is Ten Pao Group Holdings Limited's (HKG:1979) 2.5% Dividend Worth Your Time?

Dividend paying stocks like Ten Pao Group Holdings Limited (HKG:1979) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

With a 2.5% yield and a five-year payment history, investors probably think Ten Pao Group Holdings looks like a reliable dividend stock. A 2.5% yield is not inspiring, but the longer payment history has some appeal. That said, the recent jump in the share price will make Ten Pao Group Holdings's dividend yield look smaller, even though the company prospects could be improving. There are a few simple ways to reduce the risks of buying Ten Pao Group Holdings for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Ten Pao Group Holdings!

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. 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. Ten Pao Group Holdings paid out 30% of its profit as dividends, over the trailing twelve month period. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Ten Pao Group Holdings paid out 93% of its free cash flow last year, which we think is concerning if cash flows do not improve. Ten Pao Group Holdings paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough free cash flow to cover the dividend. Cash is king, as they say, and were Ten Pao Group Holdings to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

We update our data on Ten Pao Group Holdings every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

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. Looking at the data, we can see that Ten Pao Group Holdings has been paying a dividend for the past five years. During the past five-year period, the first annual payment was HK$0.02 in 2016, compared to HK$0.06 last year. This works out to be a compound annual growth rate (CAGR) of approximately 25% a year over that time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

Ten Pao Group Holdings has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, but it might be worth considering if the business has turned a corner.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Ten Pao Group Holdings has grown its earnings per share at 4.6% per annum over the past five years. A payout ratio below 50% leaves ample room to reinvest in the business, and provides finanical flexibility. However, earnings per share are unfortunately not growing much. Might this suggest that the company should pay a higher dividend instead?

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Firstly, the company has a conservative payout ratio, although we'd note that its cashflow in the past year was substantially lower than its reported profit. Unfortunately, earnings growth has also been mediocre, and the company has cut its dividend at least once in the past. In sum, we find it hard to get excited about Ten Pao Group Holdings from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 3 warning signs for Ten Pao Group Holdings that investors should take into consideration.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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