Does IMAX China Holding, Inc. (HKG:1970) Have A Place In Your Dividend Stock Portfolio?

Dividend paying stocks like IMAX China Holding, Inc. (HKG:1970) 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. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

Some readers mightn't know much about IMAX China Holding's 2.2% dividend, as it has only been paying distributions for the last three years. While it may not look like much, if earnings are growing it could become quite interesting. The company also bought back stock equivalent to around 0.6% of market capitalisation this year. There are a few simple ways to reduce the risks of buying IMAX China Holding for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on IMAX China Holding!

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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Although it reported a loss over the past 12 months, IMAX China Holding currently pays a dividend. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

IMAX China Holding paid out 543% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely.

With a strong net cash balance, IMAX China Holding investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on IMAX China Holding's financial position here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. 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. Its most recent annual dividend was US$0.04 per share, effectively flat on its first payment three years ago.

We like that the dividend hasn't been shrinking. However we're conscious that the company hasn't got an overly long track record of dividend payments yet, which makes us wary of relying on its dividend income.

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. It's good to see IMAX China Holding has been growing its earnings per share at 56% a year over the past five years.

Conclusion

To summarise, shareholders should always check that IMAX China Holding's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. IMAX China Holding's dividend is not well covered by free cash flow, plus it paid a dividend while being unprofitable. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we'd like. In summary, IMAX China Holding has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 1 warning sign for IMAX China Holding that you should be aware of before investing.

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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