Microware Group (HKG:1985) Is Reducing Its Dividend To HK$0.02

Microware Group Limited (HKG:1985) is reducing its dividend from last year's comparable payment to HK$0.02 on the 29th of December. However, the dividend yield of 7.7% is still a decent boost to shareholder returns.

View our latest analysis for Microware Group

Microware Group Is Paying Out More Than It Is Earning

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. The last dividend was quite easily covered by Microware Group's earnings. This indicates that a lot of the earnings are being reinvested into the business, with the aim of fueling growth.

EPS is set to grow by 2.5% over the next year if recent trends continue. If the dividend continues on its recent course, the payout ratio in 12 months could be 132%, which is a bit high and could start applying pressure to the balance sheet.

Microware Group's Dividend Has Lacked Consistency

Looking back, Microware Group's dividend hasn't been particularly consistent. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. The annual payment during the last 6 years was HK$0.06 in 2017, and the most recent fiscal year payment was HK$0.07. This implies that the company grew its distributions at a yearly rate of about 2.6% over that duration. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.

Dividend Growth May Be Hard To Achieve

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. However, Microware Group has only grown its earnings per share at 2.5% per annum over the past five years. Growth of 2.5% may indicate that the company has limited investment opportunity so it is returning its earnings to shareholders instead. This could mean the dividend doesn't have the growth potential we look for going into the future.

In Summary

Overall, while it's not great to see that the dividend has been cut, we think the company is now in a good position to make consistent payments going into the future. The payout ratio looks good, but unfortunately the company's dividend track record isn't stellar. This looks like it could be a good dividend stock going forward, but we would note that the payout ratio has been at higher levels in the past so it could happen again.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 4 warning signs for Microware Group that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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