Hong Kong Exchanges and Clearing (HKG:388) Is Reducing Its Dividend To HK$4.18

Hong Kong Exchanges and Clearing Limited (HKG:388) has announced it will be reducing its dividend payable on the 23rd of March to HK$4.18. This means that the annual payment is 2.3% of the current stock price, which is lower than what the rest of the industry is paying.

Check out our latest analysis for Hong Kong Exchanges and Clearing

Hong Kong Exchanges and Clearing's Dividend Is Well Covered By Earnings

The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. Prior to this announcement, Hong Kong Exchanges and Clearing was paying out 90% of earnings and more than 75% of free cash flows. This indicates that the company is more focused on returning cash to shareholders than growing the business, but it is still in a reasonable range to continue with.

Over the next year, EPS is forecast to expand by 7.2%. Assuming the dividend continues along recent trends, our estimates say the payout ratio could reach 93%. This is definitely on the higher side, but we wouldn't necessarily say this is unsustainable.

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. Since 2012, the dividend has gone from HK$4.20 to HK$8.87. This means that it has been growing its distributions at 7.8% per annum over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Hong Kong Exchanges and Clearing might have put its house in order since then, but we remain cautious.

Hong Kong Exchanges and Clearing's Dividend Might Lack Growth

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Hong Kong Exchanges and Clearing has seen EPS rising for the last five years, at 16% per annum. EPS has been growing at a reasonable rate, although with most of the profits being paid out to shareholders, growth prospects could be more limited in the future.

Our Thoughts On Hong Kong Exchanges and Clearing's Dividend

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. While we generally think the level of distributions are a bit high, we wouldn't rule it out as becoming a good dividend payer in the future as its earnings are growing healthily. We would probably look elsewhere for an income investment.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Earnings growth generally bodes well for the future value of company dividend payments. See if the 28 Hong Kong Exchanges and Clearing analysts we track are forecasting continued growth with our free report on analyst estimates for the company. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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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.