Here's How We Evaluate Four Seas Mercantile Holdings Limited's (HKG:374) Dividend

Dividend paying stocks like Four Seas Mercantile Holdings Limited (HKG:374) 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. 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.

A high yield and a long history of paying dividends is an appealing combination for Four Seas Mercantile Holdings. 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 Four Seas Mercantile Holdings for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Four Seas Mercantile Holdings!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, 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. While Four Seas Mercantile Holdings pays a dividend, it reported a loss over the last year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

Four Seas Mercantile Holdings' cash payout ratio last year was 22%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout.

Remember, you can always get a snapshot of Four Seas Mercantile Holdings' latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Four Seas Mercantile Holdings has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past 10-year period, the first annual payment was HK$0.07 in 2010, compared to HK$0.1 last year. This works out to be a compound annual growth rate (CAGR) of approximately 3.1% a year over that time.

While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is unappealing.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Over the past five years, it looks as though Four Seas Mercantile Holdings' EPS have declined at around 23% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Four Seas Mercantile Holdings' earnings per share, which support the dividend, have been anything but stable.

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. We're a bit uncomfortable with the company paying a dividend while being loss-making, although at least the dividend was covered by free cash flow. Moreover, earnings have been shrinking. While the dividends have been fairly steady, we'd wonder for how much longer this will be sustainable if earnings continue to decline. Ultimately, Four Seas Mercantile Holdings comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.

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. Just as an example, we've come accross 3 warning signs for Four Seas Mercantile Holdings you should be aware of, and 2 of them are potentially serious.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

If you’re looking to trade Four Seas Mercantile Holdings, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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