The board of Ever Reach Group (Holdings) Company Limited (HKG:3616) has announced that it will pay a dividend on the 8th of July, with investors receiving HK$0.06 per share. This means the annual payment is 7.7% of the current stock price, which is above the average for the industry.
Ever Reach Group (Holdings)'s Payment Has Solid Earnings Coverage
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, Ever Reach Group (Holdings)'s earnings easily covered the dividend, but free cash flows were negative. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.
Looking forward, earnings per share could rise by 25.4% over the next year if the trend from the last few years continues. Assuming the dividend continues along recent trends, we think the payout ratio could be 19% by next year, which is in a pretty sustainable range.
Ever Reach Group (Holdings)'s Dividend Has Lacked Consistency
Even in its short history, we have seen the dividend cut. The last annual payment of CN¥0.05 was flat on the first annual payment 3 years ago. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.
The Dividend Looks Likely To Grow
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. We are encouraged to see that Ever Reach Group (Holdings) has grown earnings per share at 25% per year over the past five years. Earnings have been growing rapidly, and with a low payout ratio we think that the company could turn out to be a great dividend stock.
Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. This company is not in the top tier of income providing stocks.
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. To that end, Ever Reach Group (Holdings) has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about. Is Ever Reach Group (Holdings) not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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