Stock Analysis

Is Wah Ha Realty Company Limited (HKG:278) A Risky Dividend Stock?

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SEHK:278
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Today we'll take a closer look at Wah Ha Realty Company Limited (HKG:278) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

With Wah Ha Realty yielding 6.3% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. It would not be a surprise to discover that many investors buy it for the dividends. Some simple analysis can reduce the risk of holding Wah Ha Realty for its dividend, and we'll focus on the most important aspects below.

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historic-dividend
SEHK:278 Historic Dividend March 12th 2021

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. While Wah Ha Realty pays a dividend, it reported a loss over the last year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

Wah Ha Realty paid out 2,850% of its free cash flow last year, which we think is concerning if cash flows do not improve. 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.

With a strong net cash balance, Wah Ha Realty investors may not have much to worry about in the near term from a dividend perspective.

We update our data on Wah Ha Realty every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

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. Wah Ha Realty has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was HK$0.08 in 2011, compared to HK$0.3 last year. This works out to be a compound annual growth rate (CAGR) of approximately 14% a year over that time. Wah Ha Realty's dividend payments have fluctuated, so it hasn't grown 14% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

So, its dividends have grown at a rapid rate over this time, but payments have been cut in the past. The stock may still be worth considering as part of a diversified dividend portfolio.

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 Wah Ha Realty's EPS have declined at around 15% 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. We're a bit uncomfortable with Wah Ha Realty paying a dividend while loss-making, especially since the dividend was also not well covered by free cash flow. Earnings per share are down, and Wah Ha Realty's dividend has been cut at least once in the past, which is disappointing. In this analysis, Wah Ha Realty doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 3 warning signs for Wah Ha Realty (of which 1 is a bit unpleasant!) 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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