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Should You Buy Associated International Hotels Limited (HKG:105) For Its 5.9% Dividend?

Simply Wall St

Dividend paying stocks like Associated International Hotels Limited (HKG:105) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. 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.

With a nine-year payment history and a 5.9% yield, many investors probably find Associated International Hotels intriguing. We'd agree the yield does look enticing. Some simple research can reduce the risk of buying Associated International Hotels for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Associated International Hotels!

SEHK:105 Historical Dividend Yield, December 30th 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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. While Associated International Hotels pays a dividend, it reported a loss over the last year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

Associated International Hotels paid out 110% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow.

While the above analysis focuses on dividends relative to a company's earnings, we do note Associated International Hotels'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 Associated International Hotels'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. The first recorded dividend for Associated International Hotels, in the last decade, was nine years ago. Its dividend has not fluctuated much that time, which we like, but we're conscious that the company might not yet have a track record of maintaining dividends in all economic conditions. During the past nine-year period, the first annual payment was HK$0.45 in 2010, compared to HK$1.12 last year. This works out to be a compound annual growth rate (CAGR) of approximately 11% a year over that time.

The dividend has been growing pretty quickly, which could be enough to get us interested even though the dividend history is relatively short. Further research may be warranted.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Associated International Hotels's EPS have fallen by approximately 51% per year during the past five years. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

Conclusion

To summarise, shareholders should always check that Associated International Hotels's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're a bit uncomfortable with Associated International Hotels paying a dividend while loss-making, especially since the dividend was also not well covered by free cash flow. Earnings per share are down, and to our mind Associated International Hotels has not been paying a dividend long enough to demonstrate its resilience across economic cycles. There are a few too many issues for us to get comfortable with Associated International Hotels from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Associated International Hotels stock.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

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.

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. Thank you for reading.