The board of Automated Systems Holdings Limited (HKG:771) has announced that it will pay a dividend on the 24th of June, with investors receiving HK$0.03 per share. The dividend yield will be 26% based on this payment which is still above the industry average.
Automated Systems Holdings Is Paying Out More Than It Is Earning
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, Automated Systems Holdings' dividend was higher than its profits, but the free cash flows quite comfortably covered it. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.
Looking forward, EPS could fall by 39.7% if the company can't turn things around from the last few years. If the dividend continues along recent trends, we estimate the payout ratio could reach 10,482%, which could put the dividend in jeopardy if the company's earnings don't improve.
The company has a long dividend track record, but it doesn't look great with cuts in the past. The first annual payment during the last 10 years was HK$0.038 in 2012, and the most recent fiscal year payment was HK$0.03. The dividend has shrunk at around 2.3% a year during that period. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.
The Dividend Has Limited Growth Potential
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Over the past five years, it looks as though Automated Systems Holdings' EPS has declined at around 40% a year. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future.
Automated Systems Holdings' Dividend Doesn't Look Sustainable
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Automated Systems Holdings' payments, as there could be some issues with sustaining them into the future. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. Overall, we don't think this company has the makings of a good income stock.
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. Case in point: We've spotted 5 warning signs for Automated Systems Holdings (of which 1 shouldn't be ignored!) you should know about. 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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