Today we’ll take a closer look at Travel Expert (Asia) Enterprises Limited (HKG:1235) 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. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
With a goodly-sized dividend yield despite a relatively short payment history, investors might be wondering if Travel Expert (Asia) Enterprises is a new dividend aristocrat in the making. We’d agree the yield does look enticing. The company also returned around 1.7% of its market capitalisation to shareholders in the form of stock buybacks over the past year. Some simple analysis can reduce the risk of holding Travel Expert (Asia) Enterprises for its dividend, and we’ll focus on the most important aspects below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. Although it reported a loss over the past 12 months, Travel Expert (Asia) Enterprises 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.
Last year, Travel Expert (Asia) Enterprises paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.
While the above analysis focuses on dividends relative to a company’s earnings, we do note Travel Expert (Asia) Enterprises’s strong net cash position, which will let it pay larger dividends for a time, should it choose.
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. Travel Expert (Asia) Enterprises has been paying a dividend for the past seven years. It’s good to see that Travel Expert (Asia) Enterprises has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we’re concerned that what has been cut once, could be cut again. During the past seven-year period, the first annual payment was HK$0.036 in 2012, compared to HK$0.02 last year. This works out to be a decline of approximately 8.1% per year over that time. Travel Expert (Asia) Enterprises’s dividend has been cut sharply at least once, so it hasn’t fallen by 8.1% every year, but this is a decent approximation of the long term change.
We struggle to make a case for buying Travel Expert (Asia) Enterprises for its dividend, given that payments have shrunk over the past seven years.
Dividend Growth Potential
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Travel Expert (Asia) Enterprises’s EPS have fallen by approximately 62% per year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Travel Expert (Asia) Enterprises’s earnings per share, which support the dividend, have been anything but stable.
To summarise, shareholders should always check that Travel Expert (Asia) Enterprises’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Travel Expert (Asia) Enterprises’s dividend is not well covered by free cash flow, plus it paid a dividend while being unprofitable. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. Using these criteria, Travel Expert (Asia) Enterprises looks quite suboptimal from a dividend investment perspective.
You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Travel Expert (Asia) Enterprises stock.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.