Are Dividend Investors Getting More Than They Bargained For With AEON Stores (Hong Kong) Co., Limited's (HKG:984) Dividend?

Is AEON Stores (Hong Kong) Co., Limited (HKG:984) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.

In this case, AEON Stores (Hong Kong) likely looks attractive to investors, given its 4.4% dividend yield and a payment history of over ten years. It would not be a surprise to discover that many investors buy it for the dividends. There are a few simple ways to reduce the risks of buying AEON Stores (Hong Kong) for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on AEON Stores (Hong Kong)!

Payout ratios

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. While AEON Stores (Hong Kong) pays a dividend, it reported a loss over the last year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

AEON Stores (Hong Kong)'s cash payout ratio last year was 9.6%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout.

With a strong net cash balance, AEON Stores (Hong Kong) investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on AEON Stores (Hong Kong)'s financial position 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. AEON Stores (Hong Kong) has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was HK$0.3 in 2011, compared to HK$0.1 last year. The dividend has fallen 69% over that period.

A shrinking dividend over a 10-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

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. AEON Stores (Hong Kong)'s EPS have fallen by approximately 69% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and AEON Stores (Hong Kong)'s earnings per share, which support the dividend, have been anything but stable.

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 not keen on the fact that AEON Stores (Hong Kong) paid dividends despite reporting a loss over the past year, although fortunately its dividend was covered by cash flow. Earnings per share are down, and AEON Stores (Hong Kong)'s dividend has been cut at least once in the past, which is disappointing. With this information in mind, we think AEON Stores (Hong Kong) may not be an ideal dividend stock.

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, AEON Stores (Hong Kong) has 3 warning signs (and 1 which can't be ignored) we think you should know about.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

If you decide to trade AEON Stores (Hong Kong), use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.