Hong Kong Exchanges and Clearing (HKG:388) Has Announced A Dividend Of HK$3.91

The board of Hong Kong Exchanges and Clearing Limited (HKG:388) has announced that it will pay a dividend on the 27th of March, with investors receiving HK$3.91 per share. The payment will take the dividend yield to 3.5%, which is in line with the average for the industry.

View our latest analysis for Hong Kong Exchanges and Clearing

Hong Kong Exchanges and Clearing's Payment Has Solid Earnings Coverage

We aren't too impressed by dividend yields unless they can be sustained over time. Prior to this announcement, Hong Kong Exchanges and Clearing's dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 105% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.

Earnings per share is forecast to rise by 16.4% over the next year. If the dividend continues along recent trends, we estimate the payout ratio could reach 84%, which is on the higher side, but certainly still feasible.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The annual payment during the last 10 years was HK$3.28 in 2014, and the most recent fiscal year payment was HK$8.41. This works out to be a compound annual growth rate (CAGR) of approximately 9.9% a year over that time. We like to see dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.

The Dividend's Growth Prospects Are Limited

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. However, Hong Kong Exchanges and Clearing has only grown its earnings per share at 4.6% per annum over the past five years. Slow growth and a high payout ratio could mean that Hong Kong Exchanges and Clearing has maxed out the amount that it has been able to pay to shareholders. That's fine as far as it goes, but we're less enthusiastic as this often signals that the dividend is likely to grow slower in the future.

Hong Kong Exchanges and Clearing's Dividend Doesn't Look Sustainable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The track record isn't great, and the payments are a bit high to be considered sustainable. We would be a touch cautious of relying on this stock primarily for the dividend income.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. 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 1 warning sign for Hong Kong Exchanges and Clearing that investors should take into consideration. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.