Read This Before Buying Uni-President China Holdings Ltd (HKG:220) For Its Dividend

Dividend paying stocks like Uni-President China Holdings Ltd (HKG:220) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

With Uni-President China Holdings yielding 5.0% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. It would not be a surprise to discover that many investors buy it for the dividends. Some simple analysis can reduce the risk of holding Uni-President China Holdings for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Uni-President China Holdings!

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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Looking at the data, we can see that 95% of Uni-President China Holdings' profits were paid out as dividends in the last 12 months. With a payout ratio this high, we'd say its dividend is not well covered by earnings. This may be fine if earnings are growing, but it might not take much of a downturn for the dividend to come under pressure.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Uni-President China Holdings paid out a conservative 49% of its free cash flow as dividends last year. It's good to see that while Uni-President China Holdings' dividends were not well covered by profits, at least they are affordable from a free cash flow perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

While the above analysis focuses on dividends relative to a company's earnings, we do note Uni-President China Holdings' strong net cash position, which will let it pay larger dividends for a time, should it choose.

We update our data on Uni-President China Holdings every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of Uni-President China Holdings' dividend payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was CN¥0.1 in 2010, compared to CN¥0.3 last year. This works out to be a compound annual growth rate (CAGR) of approximately 12% a year over that time. Uni-President China Holdings' dividend payments have fluctuated, so it hasn't grown 12% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

So, its dividends have grown at a rapid rate over this time, but payments have been cut in the past. The stock may still be worth considering as part of a diversified dividend portfolio.

Dividend Growth Potential

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. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Uni-President China Holdings has grown its earnings per share at 18% per annum over the past five years. While EPS are growing rapidly, Uni-President China Holdings paid out a very high 95% of its income as dividends. If earnings continue to grow, this dividend may be sustainable, but we think a payout this high definitely bears watching.

Conclusion

To summarise, shareholders should always check that Uni-President China Holdings' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're a bit uncomfortable with its high payout ratio, although at least the dividend was covered by free cash flow. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Uni-President China Holdings out there.

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. For instance, we've picked out 1 warning sign for Uni-President China Holdings that investors should take into consideration.

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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