Fairwood Holdings Limited's (HKG:52) investors are due to receive a payment of HK$0.30 per share on 3rd of October. However, the dividend yield of 5.8% is still a decent boost to shareholder returns.
Check out our latest analysis for Fairwood Holdings
Fairwood Holdings' Projections Indicate Future Payments May Be Unsustainable
If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, the company was paying out 105% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 10%. Healthy cash flows are always a positive sign, especially when they quite easily cover the dividend.
If the company can't turn things around, EPS could fall by 22.5% over the next year. If the dividend continues along recent trends, we estimate the payout ratio could reach 132%, which could put the dividend in jeopardy if the company's earnings don't improve.
Dividend Volatility
While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The annual payment during the last 10 years was HK$0.62 in 2014, and the most recent fiscal year payment was HK$0.41. Doing the maths, this is a decline of about 4.1% per year. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.
The Dividend Has Limited Growth Potential
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Over the past five years, it looks as though Fairwood Holdings' EPS has declined at around 23% a year. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future.
Fairwood Holdings' Dividend Doesn't Look Sustainable
Overall, it's not great to see that the dividend has been cut, but this might be explained by the payments being a bit high previously. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We would probably look elsewhere for an income investment.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've identified 3 warning signs for Fairwood Holdings (1 is concerning!) that you should be aware of before investing. Is Fairwood Holdings not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.