Dividend paying stocks like Hotel Royal Chihpen (GTSM:5704) 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 the income from dividends, it's important to be a lot more stringent with your investments than the average punter.
A high yield and a long history of paying dividends is an appealing combination for Hotel Royal Chihpen. We'd guess that plenty of investors have purchased it for the income. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Hotel Royal Chihpen paid out 91% of its profit as dividends. Its payout ratio is quite high, and the dividend is not well covered by earnings. If earnings are growing or the company has a large cash balance, this might be sustainable - still, we think it is a concern.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Hotel Royal Chihpen's cash payout ratio last year was 20%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. While the dividend was not well covered by profits, at least they were covered by free cash flow. Even so, if the company were to continue paying out almost all of its profits, we'd be concerned about whether the dividend is sustainable in a downturn.
While the above analysis focuses on dividends relative to a company's earnings, we do note Hotel Royal Chihpen's strong net cash position, which will let it pay larger dividends for a time, should it choose.
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. For the purpose of this article, we only scrutinise the last decade of Hotel Royal Chihpen's dividend 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 NT$0.3 in 2011, compared to NT$2.2 last year. Dividends per share have grown at approximately 22% per year over this time. The dividends haven't grown at precisely 22% every year, but this is a useful way to average out the historical rate of growth.
So, its dividends have grown at a rapid rate over this time, but payments have been cut in the past. The stock may still be worth considering as part of a diversified dividend portfolio.
Dividend Growth Potential
With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Hotel Royal Chihpen has grown its earnings per share at 18% per annum over the past five years. Although earnings per share are up nicely Hotel Royal Chihpen is paying out 91% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.
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 Hotel Royal Chihpen paid out such a high percentage of its income, although its cashflow is in better shape. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Hotel Royal Chihpen out there.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 2 warning signs for Hotel Royal Chihpen that investors need to be conscious of moving forward.
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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