King's Flair International (Holdings)'s (HKG:6822) Dividend Will Be Reduced To HK$0.06

King's Flair International (Holdings) Limited (HKG:6822) has announced it will be reducing its dividend payable on the 4th of July to HK$0.06. The dividend yield of 8.8% is still a nice boost to shareholder returns, despite the cut.

See our latest analysis for King's Flair International (Holdings)

King's Flair International (Holdings)'s Payment Has Solid Earnings Coverage

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, King's Flair International (Holdings)'s dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 108% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.

If the company can't turn things around, EPS could fall by 6.6% over the next year. If recent patterns in the dividend continue, we could see the payout ratio reaching 80% in the next 12 months which is on the higher end of the range we would say is sustainable.

King's Flair International (Holdings)'s Dividend Has Lacked Consistency

Even in its relatively short history, the company has reduced the dividend at least once. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2015, the first annual payment was HK$0.09, compared to the most recent full-year payment of HK$0.10. This works out to be a compound annual growth rate (CAGR) of approximately 1.5% a year over that time. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

Dividend Growth May Be Hard To Come By

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. It's not great to see that King's Flair International (Holdings)'s earnings per share has fallen at approximately 6.6% per year over the past five years. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed.

King's Flair International (Holdings)'s Dividend Doesn't Look Sustainable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. While King's Flair International (Holdings) is earning enough to cover the payments, the cash flows are lacking. Overall, we don't think this company has the makings of a good income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 2 warning signs for King's Flair International (Holdings) (1 can't be ignored!) that you should be aware of before investing. Is King's Flair International (Holdings) not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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