Investors In BExcellent Group Holdings Limited (HKG:1775) Should Consider This, First

Simply Wall St

Fri, Jul 12, 2019, 6:52 PM

Today we'll take a closer look at BExcellent Group Holdings Limited (HKG:1775) 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. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

BExcellent Group Holdings has only been paying a dividend for a year or so, so investors might be curious about its 5.0% yield. There are a few simple ways to reduce the risks of buying BExcellent Group Holdings for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on BExcellent Group Holdings!

SEHK:1775 Historical Dividend Yield, July 12th 2019

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 121% of BExcellent Group Holdings's profits were paid out as dividends in the last 12 months. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. BExcellent Group Holdings paid out 127% of its free cash flow last year, which we think is concerning if cash flows do not improve. Cash is slightly more important than profit from a dividend perspective, but given BExcellent Group Holdings's payouts were not well covered by either earnings or cash flow, we would definitely be concerned about the sustainability of this dividend.

While the above analysis focuses on dividends relative to a company's earnings, we do note BExcellent Group Holdings's strong net cash position, which will let it pay larger dividends for a time, should it choose.

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

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. With a payment history of less than 2 years, we think it's a bit too soon to think about living on the income from its dividend. Its most recent annual dividend was HK$0.03 per share, effectively flat on its first payment one years ago.

We like that the dividend hasn't been shrinking. However we're conscious that the company hasn't got an overly long track record of dividend payments yet, which makes us wary of relying on its dividend income.

Dividend Growth Potential

Examining whether the dividend is affordable and stable is important. However, it's also important to assess if earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient's purchasing power. In the last five years, BExcellent Group Holdings's earnings per share have shrunk at approximately 50% per annum. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company's dividend.

We'd also point out that BExcellent Group Holdings issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.

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. BExcellent Group Holdings paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. Second, earnings per share have been in decline, and the dividend history is shorter than we'd like. In this analysis, BExcellent Group 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.

You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in BExcellent Group Holdings stock.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 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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