First Pacific (HKG:142) Is Increasing Its Dividend To HK$0.10

First Pacific Company Limited (HKG:142) will increase its dividend on the 8th of July to HK$0.10. This will take the annual payment to 6.0% of the stock price, which is above what most companies in the industry pay.

See our latest analysis for First Pacific

First Pacific Is Paying Out More Than It Is Earning

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. First Pacific was earning enough to cover the previous dividend, but it was paying out quite a large proportion of its free cash flows. The business is earning enough to make the dividend feasible, but the cash payout ratio of 90% indicates it is more focused on returning cash to shareholders than growing the business.

The next 12 months is set to see EPS grow by 101.3%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 166%, which probably can't continue putting some pressure on the balance sheet.

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 US$0.026 to US$0.026. Payments have been decreasing at a very slow pace in this time period. A company that decreases its dividend over time generally isn't what we are looking for.

The Dividend Looks Likely To Grow

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. First Pacific has seen EPS rising for the last five years, at 21% per annum. The company's earnings per share has grown rapidly in recent years, and it has a good balance between reinvesting and paying dividends to shareholders, so we think that First Pacific could prove to be a strong dividend payer.

Our Thoughts On First Pacific's Dividend

In summary, while it's always good to see the dividend being raised, we don't think First Pacific's payments are rock solid. While First Pacific is earning enough to cover the dividend, we are generally unimpressed with its future prospects. We would probably look elsewhere for an income investment.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, First Pacific has 2 warning signs (and 1 which can't be ignored) we think you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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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.