KPa-BM Holdings Limited's (HKG:2663) dividend is being reduced from last year's payment covering the same period to HK$0.03 on the 26th of September. This means the annual payment is 8.6% of the current stock price, which is above the average for the industry.

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KPa-BM Holdings' Future Dividends May Potentially Be At Risk

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, KPa-BM Holdings' dividend was comfortably covered by both cash flow and earnings. This indicates that quite a large proportion of earnings is being invested back into the business.

If the company can't turn things around, EPS could fall by 6.2% over the next year. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 127%, which is definitely a bit high to be sustainable going forward.

Check out our latest analysis for KPa-BM Holdings

KPa-BM Holdings' Dividend Has Lacked Consistency

Even in its relatively short history, the company has reduced the dividend at least once. This suggests that the dividend might not be the most reliable. Since 2016, the annual payment back then was HK$0.015, compared to the most recent full-year payment of HK$0.03. This works out to be a compound annual growth rate (CAGR) of approximately 8.0% a year over that time. A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.

Dividend Growth May Be Hard To Come By

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. KPa-BM Holdings has seen earnings per share falling at 6.2% per year over the last five years. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth.

In Summary

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would be a touch cautious of relying on this stock primarily for the dividend income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Case in point: We've spotted 3 warning signs for KPa-BM Holdings (of which 1 is a bit unpleasant!) you should know about. Is KPa-BM Holdings not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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