Should Somerley Capital Holdings Limited (HKG:8439) Be Part Of Your Income Portfolio?
Is Somerley Capital Holdings Limited (HKG:8439) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
Somerley Capital Holdings has only been paying a dividend for a year or so, so investors might be curious about its 2.9% yield. That said, the recent jump in the share price will make Somerley Capital Holdings's dividend yield look smaller, even though the company prospects could be improving. Some simple research can reduce the risk of buying Somerley Capital Holdings for its dividend - read on to learn more.
Click the interactive chart for our full dividend analysis
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. Looking at the data, we can see that 985% of Somerley Capital Holdings's profits were paid out as dividends in the last 12 months. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.
Remember, you can always get a snapshot of Somerley Capital Holdings'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. This company has been paying a dividend for less than 2 years, which we think is too soon to consider it a reliable dividend stock. Dividends per share have grown at approximately 43% per year over this 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
The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient's purchasing power. Over the past three years, it looks as though Somerley Capital Holdings's EPS have declined at around 62% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Somerley Capital Holdings's earnings per share, which support the dividend, have been anything but stable.
Conclusion
To summarise, shareholders should always check that Somerley Capital Holdings'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 its high payout ratio. Earnings per share are down, and to our mind Somerley Capital Holdings has not been paying a dividend long enough to demonstrate its resilience across economic cycles. In short, we're not keen on Somerley Capital Holdings from a dividend perspective. Businesses can change, but we've spotted a few too many concerns with this one to get comfortable.
Now, if you want to look closer, it would be worth checking out our free research on Somerley Capital Holdings management tenure, salary, and performance.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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.
