Are Dividend Investors Making A Mistake With Lum Chang Holdings Limited (SGX:L19)?

Dividend paying stocks like Lum Chang Holdings Limited (SGX:L19) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

A high yield and a long history of paying dividends is an appealing combination for Lum Chang Holdings. We'd guess that plenty of investors have purchased it for the income. During the year, the company also conducted a buyback equivalent to around 0.9% of its market capitalisation. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

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Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Although it reported a loss over the past 12 months, Lum Chang Holdings currently pays a dividend. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Lum Chang Holdings' cash payout ratio in the last year was 38%, which suggests dividends were well covered by cash generated by the business.

Consider getting our latest analysis on Lum Chang Holdings' financial position here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Lum Chang Holdings has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was S$0.01 in 2010, compared to S$0.01 last year. The dividend has shrunk at around 1.4% a year during that period. Lum Chang Holdings' dividend hasn't shrunk linearly at 1.4% per annum, but the CAGR is a useful estimate of the historical rate of change.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Lum Chang Holdings' EPS have fallen by approximately 15% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Lum Chang Holdings' earnings per share, which support the dividend, have been anything but stable.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We're not keen on the fact that Lum Chang Holdings paid dividends despite reporting a loss over the past year, although fortunately its dividend was covered by cash flow. Earnings per share are down, and Lum Chang Holdings' dividend has been cut at least once in the past, which is disappointing. In summary, Lum Chang Holdings has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.

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. To that end, Lum Chang Holdings has 4 warning signs (and 2 which are potentially serious) we think you should know about.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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