Hong Kong Exchanges and Clearing Limited (HKG:388) has announced that it will be increasing its dividend from last year's comparable payment on the 26th of March to HK$4.90. Even though the dividend went up, the yield is still quite low at only 2.6%.

See our latest analysis for Hong Kong Exchanges and Clearing

Hong Kong Exchanges and Clearing's 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. Before making this announcement, Hong Kong Exchanges and Clearing was paying out quite a large proportion of both earnings and cash flow, with the dividend being 105% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.

Over the next year, EPS is forecast to expand by 20.1%. If the dividend continues along recent trends, we estimate the payout ratio could reach 80%, which is on the higher side, but certainly still feasible.

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. Since 2015, the annual payment back then was HK$3.54, compared to the most recent full-year payment of HK$9.26. This implies that the company grew its distributions at a yearly rate of about 10% over that duration. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

We Could See Hong Kong Exchanges and Clearing's Dividend Growing

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. It's encouraging to see that Hong Kong Exchanges and Clearing has been growing its earnings per share at 6.6% a year over the past five years. The payout ratio is very much on the higher end, which could mean that the growth rate will slow down in the future, and that could flow through to the dividend as well.

The Dividend Could Prove To Be Unreliable

Overall, we always like to see the dividend being raised, but we don't think Hong Kong Exchanges and Clearing will make a great income stock. The track record isn't great, and the payments are a bit high to be considered sustainable. 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. However, there are other things to consider for investors when analysing stock performance. Earnings growth generally bodes well for the future value of company dividend payments. See if the 19 Hong Kong Exchanges and Clearing analysts we track are forecasting continued growth with our free report on analyst estimates for the company. Is Hong Kong Exchanges and Clearing not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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