Is Far East Holdings Berhad (KLSE:FAREAST) A Smart Choice For Dividend Investors?

Dividend paying stocks like Far East Holdings Berhad (KLSE:FAREAST) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

A slim 1.2% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Far East Holdings Berhad could have potential. There are a few simple ways to reduce the risks of buying Far East Holdings Berhad for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Far East Holdings Berhad!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. In the last year, Far East Holdings Berhad paid out 21% of its profit as dividends. With a low payout ratio, it looks like the dividend is comprehensively covered by earnings.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Far East Holdings Berhad paid out 71% of its free cash flow last year, which is acceptable, but is starting to limit the amount of earnings that can be reinvested into the business. It's positive to see that Far East Holdings Berhad's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Remember, you can always get a snapshot of Far East Holdings Berhad's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Far East Holdings Berhad 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 RM0.05 in 2011, compared to RM0.04 last year. This works out to be a decline of approximately 4.2% per year over that time. Far East Holdings Berhad's dividend hasn't shrunk linearly at 4.2% per annum, but the CAGR is a useful estimate of the historical rate of change.

We struggle to make a case for buying Far East Holdings Berhad for its dividend, given that payments have shrunk over the past 10 years.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Earnings have grown at around 6.6% a year for the past five years, which is better than seeing them shrink! With a decent amount of growth and a low payout ratio, we think this bodes well for Far East Holdings Berhad's prospects of growing its dividend payments in the future.

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. Far East Holdings Berhad's dividend payout ratios are within normal bounds, although we note its cash flow is not as strong as the income statement would suggest. Unfortunately, earnings growth has also been mediocre, and the company has cut its dividend at least once in the past. Ultimately, Far East Holdings Berhad comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.

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 identified 2 warning signs for Far East Holdings Berhad (1 is concerning!) that you should be aware of before investing.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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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.
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