How Does Pak Fah Yeow International Limited (HKG:239) Fare As A Dividend Stock?

Could Pak Fah Yeow International Limited (HKG:239) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. 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.

A slim 2.8% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Pak Fah Yeow International could have potential. Some simple research can reduce the risk of buying Pak Fah Yeow International for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Pak Fah Yeow International!

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. Although it reported a loss over the past 12 months, Pak Fah Yeow International 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.

With a cash payout ratio of 831%, Pak Fah Yeow International's dividend payments are poorly covered by cash flow. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term.

With a strong net cash balance, Pak Fah Yeow International investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on Pak Fah Yeow International's financial position 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. Pak Fah Yeow International has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was HK$0.1 in 2010, compared to HK$0.05 last year. The dividend has shrunk at around 7.0% a year during that period. Pak Fah Yeow International's dividend hasn't shrunk linearly at 7.0% 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

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Over the past five years, it looks as though Pak Fah Yeow International's EPS have declined at around 24% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Pak Fah Yeow International's earnings per share, which support the dividend, have been anything but stable.

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. It's a concern to see that the company paid a dividend despite reporting a loss, and the dividend was also not well covered by free cash flow. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. Using these criteria, Pak Fah Yeow International looks quite suboptimal from a dividend investment perspective.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic 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 Pak Fah Yeow International you should be aware of, and 1 of them is significant.

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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