The board of Hong Leong Finance Limited (SGX:S41) has announced that it will pay a dividend of SGD0.09 per share on the 24th of May. The dividend yield of 5.0% is still a nice boost to shareholder returns, despite the cut.

View our latest analysis for Hong Leong Finance

Hong Leong Finance's Payment Expected To Have Solid Earnings Coverage

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable.

Having distributed dividends for at least 10 years, Hong Leong Finance has a long history of paying out a part of its earnings to shareholders. Based on Hong Leong Finance's last earnings report, the payout ratio is at a decent 60%, meaning that the company is able to pay out its dividend with a bit of room to spare.

Looking forward, EPS could fall by 4.8% if the company can't turn things around from the last few years. Assuming the dividend continues along recent trends, we believe the future payout ratio could be 65%, which we are pretty comfortable with and we think is feasible on an earnings basis.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. The dividend has gone from an annual total of SGD0.12 in 2014 to the most recent total annual payment of SGD0.125. Dividend payments have been growing, but very slowly over the period. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

The Dividend's Growth Prospects Are Limited

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. In the last five years, Hong Leong Finance's earnings per share has shrunk at approximately 4.8% per annum. 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.

Our Thoughts On Hong Leong Finance's Dividend

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. The company hasn't been paying a very consistent dividend over time, despite only paying out a small portion of earnings. We would be a touch cautious of relying on this stock primarily for the dividend income.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 1 warning sign for Hong Leong Finance that investors should know about before committing capital to this stock. Is Hong Leong Finance not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.