Hong Leong Finance Limited (SGX:S41) has announced that it will pay a dividend of SGD0.035 per share on the 31st of August. The dividend yield will be 6.8% based on this payment which is still above the industry average.

See 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.

Hong Leong Finance has established itself as a dividend paying company with over 10 years history of distributing earnings to shareholders. Based on Hong Leong Finance's last earnings report, the payout ratio is at a decent 58%, meaning that the company is able to pay out its dividend with a bit of room to spare.

Over the next year, EPS could expand by 4.9% if recent trends continue. If the dividend continues on this path, the future payout ratio could be 55% by next year, which we think can be pretty sustainable going forward.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2013, the dividend has gone from SGD0.12 total annually to SGD0.17. This works out to be a compound annual growth rate (CAGR) of approximately 3.5% a year over that time. 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.

Dividend Growth May Be Hard To Achieve

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. Earnings have grown at around 4.9% a year for the past five years, which isn't massive but still better than seeing them shrink. Hong Leong Finance is struggling to find viable investments, so it is returning more to shareholders. This isn't necessarily bad, but we wouldn't expect rapid dividend growth in the future.

Our Thoughts On Hong Leong Finance's Dividend

In summary, we are pleased with the dividend remaining consistent, and we think there is a good chance of this continuing in the future. The payout ratio looks good, but unfortunately the company's dividend track record isn't stellar. The payment isn't stellar, but it could make a decent addition to a dividend portfolio.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing 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. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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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.