Sunfonda Group Holdings (HKG:1771) Has Announced That Its Dividend Will Be Reduced To CN¥0.04

Sunfonda Group Holdings Limited (HKG:1771) is reducing its dividend from last year's comparable payment to CN¥0.04 on the 26th of September. The dividend yield of 8.2% is still a nice boost to shareholder returns, despite the cut.

View our latest analysis for Sunfonda Group Holdings

Sunfonda Group Holdings' Earnings Easily Cover The Distributions

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, Sunfonda Group Holdings' earnings easily covered the dividend, but free cash flows were negative. With the company not bringing in any cash, paying out to shareholders is bound to become difficult at some point.

If the trend of the last few years continues, EPS will grow by 15.2% over the next 12 months. Assuming the dividend continues along recent trends, we think the payout ratio could be 36% by next year, which is in a pretty sustainable range.

Sunfonda Group Holdings' Dividend Has Lacked Consistency

Even in its relatively short history, the company has reduced the dividend at least once. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. The annual payment during the last 7 years was CN¥0.0503 in 2015, and the most recent fiscal year payment was CN¥0.105. This implies that the company grew its distributions at a yearly rate of about 11% over that duration. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

The Dividend Looks Likely To Grow

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Sunfonda Group Holdings has impressed us by growing EPS at 15% per year over the past five years. Sunfonda Group Holdings definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.

In Summary

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. While Sunfonda Group Holdings is earning enough to cover the payments, the cash flows are lacking. We would probably look elsewhere for an income investment.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've identified 3 warning signs for Sunfonda Group Holdings (2 make us uncomfortable!) that you should be aware of before investing. Is Sunfonda Group Holdings not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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