Lam Soon (Hong Kong) (HKG:411) Is Due To Pay A Dividend Of HK$0.15

Lam Soon (Hong Kong) Limited (HKG:411) has announced that it will pay a dividend of HK$0.15 per share on the 22nd of March. This means that the annual payment will be 3.3% of the current stock price, which is in line with the average for the industry.

See our latest analysis for Lam Soon (Hong Kong)

Lam Soon (Hong Kong)'s Dividend Is Well Covered By Earnings

We aren't too impressed by dividend yields unless they can be sustained over time. Prior to this announcement, Lam Soon (Hong Kong)'s dividend was only 39% of earnings, however it was paying out 125% of free cash flows. The business might be trying to strike a balance between returning cash to shareholders and reinvesting back into the business, but this high of a payout ratio could definitely force the dividend to be cut if the company runs into a bit of a tough spot.

If the trend of the last few years continues, EPS will grow by 2.6% over the next 12 months. If the dividend continues on this path, the payout ratio could be 42% by next year, which we think can be pretty sustainable going forward.

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 dividend has gone from HK$0.16 in 2012 to the most recent annual payment of HK$0.48. This implies that the company grew its distributions at a yearly rate of about 12% over that duration. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

Dividend Growth May Be Hard To Achieve

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Earnings has been rising at 2.6% per annum over the last five years, which admittedly is a bit slow. While EPS growth is quite low, Lam Soon (Hong Kong) has the option to increase the payout ratio to return more cash to shareholders.

In Summary

Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. While Lam Soon (Hong Kong) is earning enough to cover the payments, the cash flows are lacking. This company is not in the top tier of income providing stocks.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 1 warning sign for Lam Soon (Hong Kong) that investors should know about before committing capital to this stock. 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.