The board of Asia Financial Holdings Limited (HKG:662) has announced that it will pay a dividend on the 6th of October, with investors receiving HK$0.065 per share. Despite this raise, the dividend yield of 2.8% is only a modest boost to shareholder returns.

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Asia Financial Holdings' Projected Earnings Seem Likely To Cover Future Distributions

It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. Prior to this announcement, Asia Financial Holdings' dividend was only 20% of earnings, however it was paying out 100% of free cash flows. The business might be trying to strike a balance between returning cash to shareholders and reinvesting back into the business, but this high of a payout ratio could definitely force the dividend to be cut if the company runs into a bit of a tough spot.

If the trend of the last few years continues, EPS will grow by 40.6% over the next 12 months. If the dividend continues along recent trends, we estimate the payout ratio will be 15%, which is in the range that makes us comfortable with the sustainability of the dividend.

See our latest analysis for Asia Financial Holdings

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$0.08 in 2015, and the most recent fiscal year payment was HK$0.13. This works out to be a compound annual growth rate (CAGR) of approximately 5.0% a year over that time. The dividend has seen some fluctuations in the past, so even though the dividend was raised this year, we should remember that it has been cut in the past.

The Dividend Looks Likely To Grow

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Asia Financial Holdings has impressed us by growing EPS at 41% per year over the past five years. Earnings per share is growing at a solid clip, and the payout ratio is low which we think is an ideal combination in a dividend stock as the company can quite easily raise the dividend in the future.

Our Thoughts On Asia Financial Holdings' Dividend

In summary, while it's always good to see the dividend being raised, we don't think Asia Financial Holdings' payments are rock solid. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. This company is not in the top tier of income providing stocks.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 1 warning sign for Asia Financial Holdings that investors need to be conscious of moving forward. Is Asia Financial Holdings not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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