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Here's How We Evaluate Human Health Holdings Limited's (HKG:1419) Dividend

Simply Wall St

Is Human Health Holdings Limited (HKG:1419) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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 only a three-year payment history, and a 2.5% yield, investors probably think Human Health Holdings is not much of a dividend stock. While it may not look like much, if earnings are growing it could become quite interesting. Some simple analysis can reduce the risk of holding Human Health Holdings for its dividend, and we'll focus on the most important aspects below.

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SEHK:1419 Historical Dividend Yield, October 17th 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. Human Health Holdings paid out 42% of its profit as dividends, over the trailing twelve month period. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.

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

Consider getting our latest analysis on Human Health Holdings's financial position here.

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. This company's dividend has been unstable, and with a relatively short history, we think it's a little soon to draw strong conclusions about its long term dividend potential. Its most recent annual dividend was HK$0.03 per share, effectively flat on its first payment three years ago.

It's good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth, anyway. We're not that enthused by this.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Over the past three years, it looks as though Human Health Holdings's EPS have declined at around 3.4% a year. 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.

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. Firstly, we like that Human Health Holdings has a low and conservative payout ratio. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. Human Health Holdings might not be a bad business, but it doesn't show all of the characteristics we look for in a dividend stock.

Are management backing themselves to deliver performance? Check their shareholdings in Human Health Holdings in our latest insider ownership analysis.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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.