Consider This Before Buying Win Hanverky Holdings Limited (HKG:3322) For The 8.9% Dividend

Simply Wall St

Thu, Sep 26, 2019, 6:31 PM

Today we'll take a closer look at Win Hanverky Holdings Limited (HKG:3322) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

In this case, Win Hanverky Holdings likely looks attractive to investors, given its 8.9% dividend yield and a payment history of over ten years. It would not be a surprise to discover that many investors buy it for the dividends. Remember that the recent share price drop will make Win Hanverky Holdings's yield look higher, even though recent events might have impacted the company's prospects. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

Explore this interactive chart for our latest analysis on Win Hanverky Holdings!

SEHK:3322 Historical Dividend Yield, September 27th 2019

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. Win Hanverky Holdings paid out 88% of its profit as dividends, over the trailing twelve month period. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Last year, Win Hanverky Holdings paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

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

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 Win Hanverky Holdings's dividend payments. This dividend has been unstable, which we define as having fallen by at least 20% one or more times over this time. During the past ten-year period, the first annual payment was HK$0.033 in 2009, compared to HK$0.04 last year. This works out to be a compound annual growth rate (CAGR) of approximately 1.9% a year over that time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

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. Win Hanverky Holdings's EPS have fallen by approximately 29% per year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Win Hanverky Holdings's 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. First, we think Win Hanverky Holdings has an acceptable payout ratio, although its dividend was not well covered by cashflow. Earnings per share are down, and Win Hanverky Holdings's dividend has been cut at least once in the past, which is disappointing. In this analysis, Win Hanverky Holdings doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.

See if management have their own wealth at stake, by checking insider shareholdings in Win Hanverky Holdings stock.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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