Key Things To Consider Before Buying Steve Leung Design Group Limited (HKG:2262) For Its Dividend

Could Steve Leung Design Group Limited (HKG:2262) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

Some readers mightn't know much about Steve Leung Design Group's 1.4% dividend, as it has only been paying distributions for the last two years. A low dividend might not be a bad thing, if the company is reinvesting heavily and growing its sales and profits. Some simple analysis can reduce the risk of holding Steve Leung Design Group for its dividend, and we'll focus on the most important aspects below.

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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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Steve Leung Design Group paid out 28% of its profit as dividends. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Steve Leung Design Group paid out 192% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely. While Steve Leung Design Group's dividends were covered by the company's reported profits, free cash flow is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to Steve Leung Design Group's ability to maintain its dividend.

With a strong net cash balance, Steve Leung Design Group investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on Steve Leung Design Group's financial position here.

Dividend Volatility

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. It has only been paying dividends for a few short years, and the dividend has already been cut at least once. This is one income stream we're not ready to live on. During the past two-year period, the first annual payment was HK$0.03 in 2019, compared to HK$0.01 last year. The dividend has fallen 48% over that period.

We struggle to make a case for buying Steve Leung Design Group for its dividend, given that payments have shrunk over the past two 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. Earnings have grown at around 2.9% a year for the past five years, which is better than seeing them shrink! Steve Leung Design Group is paying out less than half of its earnings, which we like. Earnings per share growth have grown slowly, which is not great, but if the retained earnings can be reinvested effectively, future growth may be stronger.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Steve Leung Design Group has a low payout ratio, which we like, although it paid out virtually all of its generated cash. Second, earnings growth has been ordinary, and its history of dividend payments is chequered - having cut its dividend at least once in the past. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Steve Leung Design Group out there.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 1 warning sign for Steve Leung Design Group that you should be aware of before investing.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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