Lam Soon (Hong Kong) (HKG:411) Is Paying Out A Larger Dividend Than Last Year

The board of Lam Soon (Hong Kong) Limited (HKG:411) has announced that it will be increasing its dividend on the 1st of December to HK$0.33. This makes the dividend yield about the same as the industry average at 3.2%.

View our latest analysis for Lam Soon (Hong Kong)

Lam Soon (Hong Kong)'s Payment Has Solid Earnings Coverage

We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Based on the last payment, Lam Soon (Hong Kong) was paying only paying out a fraction of earnings, but the payment was a massive 125% of 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 12.3% over the next 12 months. If the dividend continues on this path, the payout ratio could be 32% by next year, which we think can be pretty sustainable going forward.

Dividend Volatility

The company's dividend history has been marked by instability, with at least 1 cut in the last 10 years. The dividend has gone from HK$0.16 in 2011 to the most recent annual payment of HK$0.48. This works out to be a compound annual growth rate (CAGR) of approximately 12% a year over that time. Lam Soon (Hong Kong) has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. We are encouraged to see that Lam Soon (Hong Kong) has grown earnings per share at 12% per year over the past five years. A low payout ratio and decent growth suggests that the company is reinvesting well, and it also has plenty of room to increase the dividend over time.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Lam Soon (Hong Kong)'s payments are rock solid. While Lam Soon (Hong Kong) is earning enough to cover the payments, the cash flows are lacking. We would probably look elsewhere for an income investment.

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. Just as an example, we've come across 2 warning signs for Lam Soon (Hong Kong) you should be aware of, and 1 of them can't be ignored. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.

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.

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