Lam Soon (Hong Kong) Limited's (HKG:411) dividend will be increasing from last year's payment of the same period to HK$0.27 on 3rd of December. Based on this payment, the dividend yield for the company will be 4.7%, which is fairly typical for the industry.
See our latest analysis for Lam Soon (Hong Kong)
We aren't too impressed by dividend yields unless they can be sustained over time. Prior to this announcement, Lam Soon (Hong Kong)'s dividend was comfortably covered by both cash flow and earnings. This means that a large portion of its earnings are being retained to grow the business.
Unless the company can turn things around, EPS could fall by 9.9% over the next year. Assuming the dividend continues along recent trends, we believe the payout ratio could be 55%, which we are pretty comfortable with and we think is feasible on an earnings basis.
While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2014, the annual payment back then was HK$0.24, compared to the most recent full-year payment of HK$0.40. This implies that the company grew its distributions at a yearly rate of about 5.2% over that duration. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Lam Soon (Hong Kong) might have put its house in order since then, but we remain cautious.
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Lam Soon (Hong Kong) has seen earnings per share falling at 9.9% per year over the last five years. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed.
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. This company is not in the top tier of income providing stocks.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Lam Soon (Hong Kong) has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about. Is Lam Soon (Hong Kong) not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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