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Is Lung Kee (Bermuda) Holdings Limited (HKG:255) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.
With Lung Kee (Bermuda) Holdings yielding 8.5% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. We'd guess that plenty of investors have purchased it for the income. Some simple analysis can reduce the risk of holding Lung Kee (Bermuda) Holdings for its dividend, and we'll focus on the most important aspects below.
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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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 124% of Lung Kee (Bermuda) Holdings's profits were paid out as dividends in the last 12 months. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Of the free cash flow it generated last year, Lung Kee (Bermuda) Holdings paid out 49% as dividends, suggesting the dividend is affordable. It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Lung Kee (Bermuda) Holdings fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.
While the above analysis focuses on dividends relative to a company's earnings, we do note Lung Kee (Bermuda) Holdings's strong net cash position, which will let it pay larger dividends for a time, should it choose.
Consider getting our latest analysis on Lung Kee (Bermuda) Holdings's 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. For the purpose of this article, we only scrutinise the last decade of Lung Kee (Bermuda) Holdings's dividend payments. Its dividend payments have fallen by 20% or more on at least one occasion over the past ten years. Its most recent annual dividend was HK$0.22 per share, effectively flat on its first payment ten years ago.