The board of Dream International Limited (HKG:1126) has announced that it will pay a dividend on the 13th of October, with investors receiving HK$0.02 per share. Based on this payment, the dividend yield will be 4.4%, which is fairly typical for the industry.
Dream International's Earnings Easily Cover the Distributions
We aren't too impressed by dividend yields unless they can be sustained over time. Prior to this announcement, Dream International's earnings easily covered the dividend, but free cash flows were negative. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.
Over the next year, EPS could expand by 4.1% if recent trends continue. If the dividend continues on this path, the payout ratio could be 40% by next year, which we think can be pretty sustainable going forward.
While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The dividend has gone from HK$0.06 in 2011 to the most recent annual payment of HK$0.12. This works out to be a compound annual growth rate (CAGR) of approximately 7.2% a year over that time. We like to see dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.
The Dividend's Growth Prospects Are Limited
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Earnings have grown at around 4.1% a year for the past five years, which isn't massive but still better than seeing them shrink. While EPS growth is quite low, Dream International has the option to increase the payout ratio to return more cash to shareholders.
Our Thoughts On Dream International's Dividend
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Dream International's payments, as there could be some issues with sustaining them into the future. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. Overall, we don't think this company has the makings of a good income stock.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 2 warning signs for Dream International that investors should know about before committing capital to this stock. We have also put together a list of global stocks with a solid dividend.
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