Does Pico Far East Holdings Limited (HKG:752) Have A Place In Your Dividend Stock Portfolio?

Today we'll take a closer look at Pico Far East Holdings Limited (HKG:752) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

With Pico Far East Holdings yielding 4.0% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. We'd guess that plenty of investors have purchased it for the income. Some simple research can reduce the risk of buying Pico Far East Holdings for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Pico Far East Holdings!

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. Pico Far East Holdings paid out 61% of its profit as dividends, over the trailing twelve month period. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.

While the above analysis focuses on dividends relative to a company's earnings, we do note Pico Far East Holdings' strong net cash position, which will let it pay larger dividends for a time, should it choose.

Remember, you can always get a snapshot of Pico Far East Holdings' latest financial position, by checking our visualisation of its financial health.

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 Pico Far East Holdings' dividend payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was HK$0.07 in 2011, compared to HK$0.05 last year. The dividend has shrunk at around 3.3% a year during that period. Pico Far East Holdings' dividend hasn't shrunk linearly at 3.3% 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, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Over the past five years, it looks as though Pico Far East Holdings' EPS have declined at around 29% a year. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. First, we think Pico Far East Holdings has an acceptable payout ratio. Earnings per share are down, and Pico Far East Holdings' dividend has been cut at least once in the past, which is disappointing. To conclude, we've spotted a couple of potential concerns with Pico Far East Holdings that may make it less than ideal candidate for dividend investors.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 3 warning signs for Pico Far East Holdings that investors need to be conscious of moving forward.

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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