Should You Buy Honma Golf Limited (HKG:6858) For Its 4.5% Dividend? - Yahoo Finance

Dividend paying stocks like Honma Golf Limited (HKG:6858) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

In this case, Honma Golf pays a decent-sized 4.5% dividend yield, and has been distributing cash to shareholders for the past three years. It's certainly an attractive yield, but readers are likely curious about its staying power. Some simple analysis can reduce the risk of holding Honma Golf for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Honma Golf!

SEHK:6858 Historical Dividend Yield, February 3rd 2020

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. 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 101% of Honma Golf's profits were paid out as dividends in the last 12 months. This is quite a high payout ratio that suggests the dividend is not well covered by earnings.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Last year, Honma Golf paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

With a strong net cash balance, Honma Golf investors may not have much to worry about in the near term from a dividend perspective.

We update our data on Honma Golf every 24 hours, so you can always get our latest analysis of its financial health, here.

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. The dividend has not fluctuated much, but with a relatively short payment history, we can't be sure this is sustainable across a full market cycle. During the past three-year period, the first annual payment was JP¥3.00 in 2017, compared to JP¥3.28 last year. This works out to be a compound annual growth rate (CAGR) of approximately 3.0% a year over that time.

Modest dividend growth is good to see, especially with the payments being relatively stable. However, the payment history is relatively short and we wouldn't want to rely on this dividend too much.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. In the last five years, Honma Golf's earnings per share have shrunk at approximately 9.5% 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. Honma Golf paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. Second, earnings per share have been in decline, and the dividend history is shorter than we'd like. There are a few too many issues for us to get comfortable with Honma Golf from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

2020-02-03 05:31:47Z
https://finance.yahoo.com/news/buy-honma-golf-limited-hkg-051755969.html