Zooming in on HKG:1716's 7.7% Dividend Yield

Is Most Kwai Chung Limited (HKG:1716) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

In this case, Most Kwai Chung pays a decent-sized 7.7% dividend yield, and has been distributing cash to shareholders for the past two years. A high yield probably looks enticing, but investors are likely wondering about the short payment history. Some simple analysis can reduce the risk of holding Most Kwai Chung for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Most Kwai Chung!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Most Kwai Chung paid out 84% of its profit as dividends, over the trailing twelve month period. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Most Kwai Chung paid out 102% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. While Most Kwai Chung's 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. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to Most Kwai Chung's ability to maintain its dividend.

With a strong net cash balance, Most Kwai Chung investors may not have much to worry about in the near term from a dividend perspective.

We update our data on Most Kwai Chung 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. The company has been paying a stable dividend for a few years now, but we'd like to see more evidence of consistency over a longer period. During the past two-year period, the first annual payment was HK$0.05 in 2019, compared to HK$0.05 last year. This works out to be a decline of approximately 3.9% per year over that time.

A shrinking dividend over a two-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. It's good to see Most Kwai Chung has been growing its earnings per share at 19% a year over the past three years. Earnings per share are growing nicely, but the company is paying out most of its earnings as dividends. This might be sustainable, but we wonder why Most Kwai Chung is not retaining those earnings to reinvest in growth.

Conclusion

To summarise, shareholders should always check that Most Kwai Chung's 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 Most Kwai Chung has an acceptable payout ratio, although its dividend was not well covered by cashflow. We were also glad to see it growing earnings, although its dividend history is not as long as we'd like. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Most Kwai Chung out there.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. 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 Most Kwai Chung you should be aware of, and 1 of them makes us a bit uncomfortable.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding 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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