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Factors Income Investors Should Consider Before Adding AAC Technologies Holdings Inc. (HKG:2018) To Their Portfolio

Simply Wall St

Could AAC Technologies Holdings Inc. (HKG:2018) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

A 2.3% yield is nothing to get excited about, but investors probably think the long payment history suggests AAC Technologies Holdings has some staying power. The company also bought back stock equivalent to around 1.0% of market capitalisation this year. That said, the recent jump in the share price will make AAC Technologies Holdings's dividend yield look smaller, even though the company prospects could be improving. Some simple analysis can reduce the risk of holding AAC Technologies Holdings for its dividend, and we'll focus on the most important aspects below.

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SEHK:2018 Historical Dividend Yield, December 9th 2019

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, AAC Technologies Holdings paid out 61% of its profit as dividends. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. AAC Technologies Holdings paid out 120% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. AAC Technologies Holdings paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough free cash flow to cover the dividend. Cash is king, as they say, and were AAC Technologies Holdings to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Consider getting our latest analysis on AAC Technologies Holdings's financial position here.

Dividend Volatility

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. AAC Technologies Holdings has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut by more than 20% on at least one occasion historically. During the past ten-year period, the first annual payment was CN¥0.096 in 2009, compared to CN¥1.27 last year. Dividends per share have grown at approximately 30% per year over this time. The dividends haven't grown at precisely 30% every year, but this is a useful way to average out the historical rate of growth.

So, its dividends have grown at a rapid rate over this time, but payments have been cut in the past. The stock may still be worth considering as part of a diversified dividend portfolio.

Dividend Growth Potential

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. While there may be fluctuations in the past , AAC Technologies Holdings's earnings per share have basically not grown from where they were five years ago. Over the long term, steady earnings per share is a risk as the value of the dividends can be reduced by inflation.

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 AAC Technologies Holdings has an acceptable payout ratio, although its dividend was not well covered by cashflow. Earnings per share are down, and AAC Technologies Holdings'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 AAC Technologies Holdings from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

Given that earnings are not growing, the dividend does not look nearly so attractive. Businesses can change though, and we think it would make sense to see what analysts are forecasting for the company.

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.