Could Melbourne Enterprises Limited (HKG:158) 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 2.2% yield is nothing to get excited about, but investors probably think the long payment history suggests Melbourne Enterprises has some staying power. Some simple analysis can reduce the risk of holding Melbourne Enterprises for its dividend, and we’ll focus on the most important aspects below.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
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. Looking at the data, we can see that 5.5% of Melbourne Enterprises’s profits were paid out as dividends in the last 12 months. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Melbourne Enterprises paid out 82% of its cash flow last year. This may be sustainable but it does not leave much of a buffer for unexpected circumstances. It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
We update our data on Melbourne Enterprises every 24 hours, so you can always get our latest analysis of its financial health, here.
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. For the purpose of this article, we only scrutinise the last decade of Melbourne Enterprises’s dividend payments. The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past ten-year period, the first annual payment was HK$3.70 in 2009, compared to HK$5.10 last year. Dividends per share have grown at approximately 3.3% per year over this time.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. It’s good to see Melbourne Enterprises has been growing its earnings per share at 32% a year over the past 5 years. Earnings per share have grown rapidly, and the company is retaining a majority of its earnings. We think this is ideal from an investment perspective, if the company is able to reinvest these earnings effectively.
To summarise, shareholders should always check that Melbourne Enterprises’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that Melbourne Enterprises pays out a low fraction of earnings. It pays out a higher percentage of its cashflow, although this is within acceptable bounds. We like that it has been delivering solid improvement in its earnings per share, and relatively consistent dividend payments. Melbourne Enterprises performs highly under this analysis, although it falls slightly short of our exacting standards. At the right valuation, it could be a solid dividend prospect.
You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Melbourne Enterprises stock.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 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 firstname.lastname@example.org. 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.