VSTECS Holdings Limited (HKG:856) stock is about to trade ex-dividend in 4 days time. Ex-dividend means that investors that purchase the stock on or after the 1st of June will not receive this dividend, which will be paid on the 7th of July.
VSTECS Holdings's next dividend payment will be HK$0.17 per share, and in the last 12 months, the company paid a total of HK$0.17 per share. Looking at the last 12 months of distributions, VSTECS Holdings has a trailing yield of approximately 4.8% on its current stock price of HK$3.45. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether VSTECS Holdings can afford its dividend, and if the dividend could grow.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. That's why it's good to see VSTECS Holdings paying out a modest 29% of its earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 20% of its free cash flow as dividends last year, which is conservatively low.
It's positive to see that VSTECS Holdings's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see VSTECS Holdings earnings per share are up 7.0% per annum over the last five years. The company is retaining more than half of its earnings within the business, and it has been growing earnings at a decent rate. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. VSTECS Holdings has delivered an average of 18% per year annual increase in its dividend, based on the past ten years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
To Sum It Up
From a dividend perspective, should investors buy or avoid VSTECS Holdings? Earnings per share growth has been growing somewhat, and VSTECS Holdings is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and VSTECS Holdings is halfway there. It's a promising combination that should mark this company worthy of closer attention.
In light of that, while VSTECS Holdings has an appealing dividend, it's worth knowing the risks involved with this stock. To help with this, we've discovered 2 warning signs for VSTECS Holdings (1 is a bit concerning!) that you ought to be aware of before buying the shares.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.