Hotai Finance's (TWSE:6592) Dividend Is Being Reduced To NT$3.00

Hotai Finance Co., Ltd. (TWSE:6592) is reducing its dividend from last year's comparable payment to NT$3.00 on the 16th of August. The dividend yield of 2.7% is still a nice boost to shareholder returns, despite the cut.

View our latest analysis for Hotai Finance

Hotai Finance's Payment Has Solid Earnings Coverage

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, Hotai Finance was earning enough to cover the dividend, but it wasn't generating any free cash flows. No cash flows could definitely make returning cash to shareholders difficult, or at least mean the balance sheet will come under pressure.

Looking forward, earnings per share is forecast to rise by 7.4% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 62% by next year, which is in a pretty sustainable range.

Hotai Finance Is Still Building Its Track Record

Hotai Finance's dividend has been pretty stable for a little while now, but we will continue to be cautious until it has been demonstrated for a few more years. The last annual payment of NT$3.00 was flat on the annual payment from5 years ago. It's good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn't want to depend on this dividend too heavily.

Dividend Growth May Be Hard To Achieve

The company's investors will be pleased to have been receiving dividend income for some time. However, Hotai Finance's EPS was effectively flat over the past five years, which could stop the company from paying more every year. Growth of 1.8% may indicate that the company has limited investment opportunity so it is returning its earnings to shareholders instead. While this isn't necessarily a negative, it definitely signals that dividend growth could be constrained in the future unless earnings start to pick up again.

An additional note is that the company has been raising capital by issuing stock equal to 18% of shares outstanding in the last 12 months. Regularly doing this can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.

Our Thoughts On Hotai Finance's Dividend

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. While Hotai Finance is earning enough to cover the payments, the cash flows are lacking. We don't think Hotai Finance is a great stock to add to your portfolio if income is your focus.

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. To that end, Hotai Finance has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com