Factors Income Investors Should Consider Before Adding Shun Tak Holdings Limited (HKG:242) To Their Portfolio

Is Shun Tak Holdings Limited (HKG:242) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

With Shun Tak Holdings yielding 7.4% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. We'd guess that plenty of investors have purchased it for the income. Some simple analysis can reduce the risk of holding Shun Tak Holdings for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Shun Tak Holdings!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Although it reported a loss over the past 12 months, Shun Tak Holdings currently pays a dividend. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Shun Tak Holdings paid out 97% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow.

Remember, you can always get a snapshot of Shun Tak Holdings' latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Shun Tak Holdings has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was HK$0.2 in 2010, compared to HK$0.2 last year. This works out to be a decline of approximately 2.2% per year over that time. Shun Tak Holdings' dividend hasn't shrunk linearly at 2.2% per annum, but the CAGR is a useful estimate of the historical rate of change.

We struggle to make a case for buying Shun Tak Holdings for its dividend, given that payments have shrunk over the past 10 years.

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. It's good to see Shun Tak Holdings has been growing its earnings per share at 29% a year over the past five years.

Conclusion

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. It's a concern to see that the company paid a dividend despite reporting a loss, and the dividend was also not well covered by free cash flow. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. In summary, Shun Tak Holdings has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. To that end, Shun Tak Holdings has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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