Should You Buy Television Broadcasts Limited (HKG:511) For Its 7.6% Dividend?

Dividend paying stocks like Television Broadcasts Limited (HKG:511) 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.

So you might want to consider getting our latest analysis on Television Broadcasts's financial health here.

A high yield and a long history of paying dividends is an appealing combination for Television Broadcasts. We'd guess that plenty of investors have purchased it for the income. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

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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. 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. Although Television Broadcasts pays a dividend, it was loss-making during the past year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

Television Broadcasts paid out 636% 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.

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. For the purpose of this article, we only scrutinise the last decade of Television Broadcasts's dividend payments. The dividend has been cut by more than 20% on at least one occasion historically. During the past ten-year period, the first annual payment was HK$1.70 in 2009, compared to HK$1.00 last year. The dividend has shrunk at around 5.2% a year during that period. Television Broadcasts's dividend hasn't shrunk linearly at 5.2% per annum, but the CAGR is a useful estimate of the historical rate of change.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Television Broadcasts's EPS have fallen by approximately 54% per year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Television Broadcasts's earnings per share, which support the dividend, have been anything but stable.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Television Broadcasts's dividend is not well covered by free cash flow, plus it paid a dividend while being unprofitable. Earnings per share are down, and Television Broadcasts's dividend has been cut at least once in the past, which is disappointing. There are a few too many issues for us to get comfortable with Television Broadcasts from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

Are management backing themselves to deliver performance? Check their shareholdings in Television Broadcasts in our latest insider ownership analysis.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.