LH Group Limited's (HKG:1978) dividend is being reduced to HK$0.06 on the 30th of June. The dividend yield of 8.0% is still a nice boost to shareholder returns, despite the cut.
LH Group's Payment Has Solid Earnings Coverage
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, LH Group's dividend made up quite a large proportion of earnings but only of free cash flows. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.
Over the next year, EPS could expand by 31.9% if recent trends continue. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 72% which would be quite comfortable going to take the dividend forward.
LH Group's Dividend Has Lacked Consistency
Looking back, the company hasn't been paying the most consistent dividend, but with such a short dividend history it could be too early to draw solid conclusions. The dividend has gone from HK$0.054 in 2019 to the most recent annual payment of HK$0.085. This works out to be a compound annual growth rate (CAGR) of approximately 16% a year over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.
Dividend Growth Could Be Constrained
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. It's encouraging to see LH Group has been growing its earnings per share at 32% a year over the past three years. Earnings per share is growing nicely, but the company is paying out most of its earnings as dividends. This might be sustainable, but we wonder why LH Group is not retaining those earnings to reinvest in growth.
In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. This company is not in the top tier of income providing stocks.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 4 warning signs for LH Group that investors should take into consideration. Is LH Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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