Hong Leong Finance Limited's (SGX:S41) investors are due to receive a payment of SGD0.09 per share on 24th of May. This means the annual payment is 5.0% of the current stock price, which is above the average for the industry.

Check out our latest analysis for Hong Leong Finance

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

We like to see robust dividend yields, but that doesn't matter if the payment isn't 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. Taking data from its last earnings report, calculating for the company's payout ratio shows 60%, which means that Hong Leong Finance would be able to pay its last dividend without pressure on the balance sheet.

EPS is set to fall by 4.8% over the next 12 months if recent trends continue. If the dividend continues along the path it has been on recently, we estimate the future payout ratio could be 65%, which is definitely feasible to continue.

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 SGD0.12 in 2014, and the most recent fiscal year payment was SGD0.125. Dividend payments have grown at less than 1% a year over this 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. Over the past five years, it looks as though Hong Leong Finance's EPS has declined at around 4.8% a year. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends.

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 low payout ratio is a redeeming feature, but generally we are not too happy with the payments Hong Leong Finance has been making. Overall, we don't think this company has the makings of a good income stock.

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. Taking the debate a bit further, we've identified 1 warning sign for Hong Leong Finance that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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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.