Read This Before Buying Red Star Macalline Group Corporation Ltd. (HKG:1528) For Its Dividend

Today we'll take a closer look at Red Star Macalline Group Corporation Ltd. (HKG:1528) 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 a five-year payment history and a 4.4% yield, many investors probably find Red Star Macalline Group intriguing. We'd agree the yield does look enticing. The company also bought back stock during the year, equivalent to approximately 12% of the company's market capitalisation at the time. Some simple analysis can reduce the risk of holding Red Star Macalline Group for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Red Star Macalline Group!

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. Looking at the data, we can see that 41% of Red Star Macalline Group's profits were paid out as dividends in the last 12 months. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Plus, there is room to increase the payout ratio over time.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Unfortunately, while Red Star Macalline Group pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.

Consider getting our latest analysis on Red Star Macalline Group's financial position here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the data, we can see that Red Star Macalline Group has been paying a dividend for the past five years. During the past five-year period, the first annual payment was CN¥0.4 in 2016, compared to CN¥0.2 last year. Dividend payments have fallen sharply, down 51% over that time.

We struggle to make a case for buying Red Star Macalline Group for its dividend, given that payments have shrunk over the past five years.

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 three years, it looks as though Red Star Macalline Group's EPS have declined at around 13% 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

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. Firstly, the company has a conservative payout ratio, although we'd note that its cashflow in the past year was substantially lower than its reported profit. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In summary, Red Star Macalline Group has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Red Star Macalline Group has 4 warning signs (and 1 which can't be ignored) we think you should know about.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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