Read This Before Buying Tang Palace (China) Holdings Limited (HKG:1181) For Its Dividend

Today we'll take a closer look at Tang Palace (China) Holdings Limited (HKG:1181) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

In this case, Tang Palace (China) Holdings likely looks attractive to dividend investors, given its 5.4% dividend yield and nine-year payment history. We'd agree the yield does look enticing. There are a few simple ways to reduce the risks of buying Tang Palace (China) Holdings for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Tang Palace (China) 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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 621% of Tang Palace (China) Holdings' profits were paid out as dividends in the last 12 months. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

While the above analysis focuses on dividends relative to a company's earnings, we do note Tang Palace (China) Holdings' strong net cash position, which will let it pay larger dividends for a time, should it choose.

We update our data on Tang Palace (China) Holdings every 24 hours, so you can always get our latest analysis of its financial health, here.

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. The first recorded dividend for Tang Palace (China) Holdings, in the last decade, was nine years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we're cautious about the consistency of its dividend across a full economic cycle. During the past nine-year period, the first annual payment was CN¥0.03 in 2012, compared to CN¥0.04 last year. This works out to be a compound annual growth rate (CAGR) of approximately 4.2% a year over that time. Tang Palace (China) Holdings' dividend payments have fluctuated, so it hasn't grown 4.2% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments, we don't think this is an attractive combination.

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. Over the past five years, it looks as though Tang Palace (China) Holdings' EPS have declined at around 38% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Tang Palace (China) Holdings' earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Tang Palace (China) Holdings' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Tang Palace (China) Holdings is paying out a larger percentage of its profit than we're comfortable with. Earnings per share are down, and Tang Palace (China) Holdings' dividend has been cut at least once in the past, which is disappointing. To conclude, we've spotted a couple of potential concerns with Tang Palace (China) Holdings that may make it less than ideal candidate for dividend investors.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 4 warning signs for Tang Palace (China) Holdings (of which 1 can't be ignored!) you should know about.

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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