Are Dividend Investors Making A Mistake With Tenfu (Cayman) Holdings Company Limited (HKG:6868)?

Is Tenfu (Cayman) Holdings Company Limited (HKG:6868) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.

In this case, Tenfu (Cayman) Holdings likely looks attractive to dividend investors, given its 3.9% dividend yield and nine-year payment history. We'd agree the yield does look enticing. The company also bought back stock equivalent to around 3.9% of market capitalisation this year. Some simple analysis can reduce the risk of holding Tenfu (Cayman) Holdings for its dividend, and we'll focus on the most important aspects below.

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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. Tenfu (Cayman) Holdings paid out 79% of its profit as dividends, over the trailing twelve month period. It's paying out most of its earnings, which limits the amount that can be reinvested in the business. This may indicate limited need for further capital within the business, or highlight a commitment to paying a dividend.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Tenfu (Cayman) Holdings paid out 92% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. While Tenfu (Cayman) Holdings' dividends were covered by the company's reported profits, free cash flow is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Tenfu (Cayman) Holdings to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

We update our data on Tenfu (Cayman) Holdings every 24 hours, so you can always get our latest analysis of its financial health, here.

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. Looking at the last decade of data, we can see that Tenfu (Cayman) Holdings paid its first dividend at least nine years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we're cautious about the consistency of its dividend across a full economic cycle. During the past nine-year period, the first annual payment was CN¥0.1 in 2011, compared to CN¥0.2 last year. Dividends per share have grown at approximately 4.0% per year over this time. The dividends haven't grown at precisely 4.0% every year, but this is a useful way to average out the historical rate of growth.

Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

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. Tenfu (Cayman) Holdings' EPS are effectively flat over the past five years. Over the long term, steady earnings per share is a risk as the value of the dividends can be reduced by inflation. Tenfu (Cayman) Holdings' earnings per share have barely grown, which is not ideal - perhaps this is why the company pays out the majority of its earnings to shareholders. When the rate of return on reinvestment opportunities falls below a certain minimum level, companies often elect to pay a larger dividend instead. This is why many mature companies often have larger dividend yields.

Conclusion

To summarise, shareholders should always check that Tenfu (Cayman) Holdings' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think Tenfu (Cayman) Holdings has an acceptable payout ratio, although its dividend was not well covered by cashflow. Unfortunately, the company has not been able to generate earnings growth, and cut its dividend at least once in the past. In summary, Tenfu (Cayman) Holdings has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 2 warning signs for Tenfu (Cayman) Holdings that investors should know about before committing capital to this stock.

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