Is Pacific Online Limited (HKG:543) A Strong Dividend Stock?
Today we'll take a closer look at Pacific Online Limited (HKG:543) 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, Pacific Online likely looks attractive to investors, given its 7.8% dividend yield and a payment history of over ten years. It would not be a surprise to discover that many investors buy it for the dividends. Some simple analysis can reduce the risk of holding Pacific Online for its dividend, and we'll focus on the most important aspects below.
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Payout ratios
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. In the last year, Pacific Online paid out 99% of its profit as dividends. Its payout ratio is quite high, and the dividend is not well covered by earnings. If earnings are growing or the company has a large cash balance, this might be sustainable - still, we think it is a concern.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Pacific Online paid out 140% of its free cash flow last year, which we think is concerning if cash flows do not improve. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term. As Pacific Online's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
With a strong net cash balance, Pacific Online investors may not have much to worry about in the near term from a dividend perspective.
Remember, you can always get a snapshot of Pacific Online's latest financial position, by checking our visualisation of its financial health.
Dividend Volatility
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of Pacific Online's dividend payments. This dividend has been unstable, which we define as having fallen by at least 20% one or more times over this time. During the past ten-year period, the first annual payment was CN¥0.061 in 2009, compared to CN¥0.14 last year. This works out to be a compound annual growth rate (CAGR) of approximately 8.4% a year over that time. Pacific Online's dividend payments have fluctuated, so it hasn't grown 8.4% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.
It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Pacific Online might have put its house in order since then, but we remain cautious.
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? In the last five years, Pacific Online's earnings per share have shrunk at approximately 10.0% per annum. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.
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. It's a concern to see that the company paid out such a high percentage of its earnings and cashflow as dividends. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In this analysis, Pacific Online doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.
Now, if you want to look closer, it would be worth checking out our free research on Pacific Online management tenure, salary, and performance.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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 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.
