VSTECS Holdings (HKG:856) Has Announced That Its Dividend Will Be Reduced To HK$0.17

VSTECS Holdings Limited's (HKG:856) dividend is being reduced from last year's payment covering the same period to HK$0.17 on the 6th of July. This means the annual payment is 4.1% of the current stock price, which is above the average for the industry.

Check out our latest analysis for VSTECS Holdings

VSTECS Holdings' Dividend Is Well Covered By Earnings

If the payments aren't sustainable, a high yield for a few years won't matter that much. Before making this announcement, VSTECS Holdings was paying a whopping 575% as a dividend, but this only made up 29% of its overall earnings. The business might be trying to strike a balance between returning cash to shareholders and reinvesting back into the business, but this high of a payout ratio could definitely force the dividend to be cut if the company runs into a bit of a tough spot.

Over the next year, EPS is forecast to expand by 41.0%. Assuming the dividend continues along recent trends, we think the payout ratio could be 24% by next year, which is in a pretty sustainable range.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2013, the dividend has gone from HK$0.0667 total annually to HK$0.17. This implies that the company grew its distributions at a yearly rate of about 9.8% over that duration. We have seen cuts in the past, so while the growth looks promising we would be a little bit cautious about its track record.

VSTECS Holdings May Find It Hard To Grow The Dividend

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. However, VSTECS Holdings has only grown its earnings per share at 2.4% per annum over the past five years. Earnings growth is slow, but on the plus side, the dividend payout ratio is low and dividends could grow faster than earnings, if the company decides to increase its payout ratio.

In Summary

Overall, it's not great to see that the dividend has been cut, but this might be explained by the payments being a bit high previously. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. Overall, we don't think this company has the makings of a good income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Just as an example, we've come across 3 warning signs for VSTECS Holdings you should be aware of, and 1 of them is a bit concerning. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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