Today we'll take a closer look at Travel Expert (Asia) Enterprises Limited (HKG:1235) 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. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.
In this case, Travel Expert (Asia) Enterprises likely looks attractive to dividend investors, given its 7.7% dividend yield and seven-year payment history. We'd agree the yield does look enticing. The company also returned around 1.6% of its market capitalisation to shareholders in the form of stock buybacks over the past year. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.
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. Although Travel Expert (Asia) Enterprises pays a dividend, it was loss-making during the past year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.
Last year, Travel Expert (Asia) Enterprises paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.
With a strong net cash balance, Travel Expert (Asia) Enterprises investors may not have much to worry about in the near term from a dividend perspective.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Travel Expert (Asia) Enterprises has been paying a dividend for the past seven years. Although it has been paying a dividend for several years now, the dividend has been cut at least once by more than 20%, and we're cautious about the consistency of its dividend across a full economic cycle. During the past seven-year period, the first annual payment was HK$0.036 in 2012, compared to HK$0.02 last year. The dividend has shrunk at around 8.1% a year during that period. Travel Expert (Asia) Enterprises's dividend has been cut sharply at least once, so it hasn't fallen by 8.1% every year, but this is a decent approximation of the long term change.
A shrinking dividend over a seven-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.
Dividend Growth Potential
With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Travel Expert (Asia) Enterprises's EPS have fallen by approximately 62% per year. 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.
To summarise, shareholders should always check that Travel Expert (Asia) Enterprises's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. It's a concern to see that the company paid a dividend despite reporting a loss, and the dividend was also not well covered by free cash flow. Earnings per share are down, and Travel Expert (Asia) Enterprises's dividend has been cut at least once in the past, which is disappointing. There are a few too many issues for us to get comfortable with Travel Expert (Asia) Enterprises from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.
Now, if you want to look closer, it would be worth checking out our free research on Travel Expert (Asia) Enterprises management tenure, salary, and performance.
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 firstname.lastname@example.org. 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.