Today we'll take a closer look at Xiamen International Port Co., Ltd (HKG:3378) 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. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
A slim 2.0% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Xiamen International Port could have potential. Some simple analysis can reduce the risk of holding Xiamen International Port for its dividend, and we'll focus on the most important aspects below.
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. 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, Xiamen International Port paid out 20% of its profit as dividends. We like this low payout ratio, because it implies the dividend is well covered and leaves ample opportunity for reinvestment.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Xiamen International Port paid out 100% of its free cash flow last year, which we think is concerning if cash flows do not improve. While Xiamen International Port's dividends were covered by the company's reported profits, free cash flow is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Xiamen International Port to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
We update our data on Xiamen International Port every 24 hours, so you can always get our latest analysis of its financial health, here.
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. Xiamen International Port has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have fallen by 20% or more on at least one occasion over the past ten years. During the past ten-year period, the first annual payment was CN¥0.055 in 2009, compared to CN¥0.02 last year. The dividend has shrunk at around 9.6% a year during that period. Xiamen International Port's dividend hasn't shrunk linearly at 9.6% per annum, but the CAGR is a useful estimate of the historical rate of change.
We struggle to make a case for buying Xiamen International Port for its dividend, given that payments have shrunk over the past ten years.
Dividend Growth Potential
With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. In the last five years, Xiamen International Port's earnings per share have shrunk at approximately 3.7% per annum. 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.
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 like Xiamen International Port's low dividend payout ratio, although we're a bit concerned that it paid out a substantially higher percentage of its free cash flow. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. With this information in mind, we think Xiamen International Port may not be an ideal dividend stock.
See if management have their own wealth at stake, by checking insider shareholdings in Xiamen International Port stock.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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