The board of Smart-Core Holdings Limited (HKG:2166) has announced that it will be increasing its dividend on the 30th of September to HK$0.04. This takes the annual payment to 4.7% of the current stock price, which is about average for the industry.
Smart-Core Holdings' Earnings Easily Cover the Distributions
We aren't too impressed by dividend yields unless they can be sustained over time. Smart-Core Holdings is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.
If the trend of the last few years continues, EPS will grow by 9.5% over the next 12 months. If the dividend continues along recent trends, we estimate the payout ratio will be 30%, which is in the range that makes us comfortable with the sustainability of the dividend.
Smart-Core Holdings' Dividend Has Lacked Consistency
Looking back, the company hasn't been paying the most consistent dividend, but with such a short dividend history it could be too early to draw solid conclusions. Since 2017, the first annual payment was HK$0.04, compared to the most recent full-year payment of HK$0.08. This implies that the company grew its distributions at a yearly rate of about 19% over that duration. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.
The Dividend Has Growth Potential
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's encouraging to see Smart-Core Holdings has been growing its earnings per share at 9.5% a year over the past five years. Smart-Core Holdings definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.
Our Thoughts On Smart-Core Holdings' Dividend
In summary, while it's always good to see the dividend being raised, we don't think Smart-Core Holdings' payments are rock solid. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. We would be a touch cautious of relying on this stock primarily for the dividend income.
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. Just as an example, we've come across 2 warning signs for Smart-Core Holdings you should be aware of, and 1 of them is concerning. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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