The board of G & M Holdings Limited (HKG:6038) has announced that the dividend on 21st of July will be reduced by 21% to HK$0.011. However, the dividend yield of 6.8% is still a decent boost to shareholder returns.
G & M Holdings' Earnings Easily Cover the Distributions
A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, G & M Holdings' dividend was comfortably covered by both cash flow and earnings. This indicates that quite a large proportion of earnings is being invested back into the business.
Unless the company can turn things around, EPS could fall by 17.8% over the next year. Assuming the dividend continues along recent trends, we believe the payout ratio could be 45%, which we are pretty comfortable with and we think is feasible on an earnings basis.
G & M Holdings' Dividend Has Lacked Consistency
The track record isn't the longest, but we are already seeing a bit of instability in the payments. The first annual payment during the last 3 years was HK$0.024 in 2018, and the most recent fiscal year payment was HK$0.011. The dividend has fallen 54% over that period. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.
Dividend Growth Potential Is Shaky
With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS is growing. Over the past five years, it looks as though G & M Holdings' EPS has declined at around 18% a year. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in.
Our Thoughts On G & M Holdings' Dividend
Overall, it's not great to see that the dividend has been cut, but this might be explained by the payments being a bit high previously. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would be a touch cautious of relying on this stock primarily for the dividend income.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, G & M Holdings has 3 warning signs (and 1 which is a bit concerning) we think you should know about. We have also put together a list of global stocks with a solid dividend.
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