Hongkong Land Holdings Limited's (SGX: H78) 4% Dividend Yield: How Sustainable Is It?
Hongkong Land Holdings Limited (SGX: H78) is a property investment, management, and development company with assets in various Asian cities such as Hong Kong, Singapore, Beijing, and Jakarta.
At Hongkong Land’s share price of US$5.21 currently, it has a dividend yield of 4.2%.
With a yield that is higher than that of the Singapore stock market in general, the property developer is sure to attract retirees and income-hungry investors alike amid a low interest rate environment.
However, before investing in any company for its dividend, we should go beyond the headline dividend yield and find out if it’s sustainable. If not, we could end up investing in a dividend trap.
With that, let’s explore why I think Hongkong Land’s dividends are sustainable.
Hongkong Land’s Latest Financial Highlights
Since sustainable dividend payment is always a function of business performance, let’s look at how the company has performed in its latest financial period.
For Hongkong Land’s first half of 2021, revenue grew 8% year-on-year to US$886 million mainly due to higher rental income and proceeds from its property sales.
Meanwhile, underlying profit increased by 12% to US$394 million, compared to US$353 million one year ago.
Underlying profit reflects Hongkong Land’s core business and excludes items such as fair value gains or losses on the revaluation of investment properties.
Hongkong Land said that it benefited from higher profits from development properties due to the timing of sales completions.
It added that contributions from investment properties remained resilient, despite negative rental reversions in Hong Kong.
Hongkong Land posted a net loss of US$865 million for the latest period, but this was an improvement from the previous year’s net loss of US$1.83 billion.
The losses in both years were due to non-cash fair value losses arising from the revaluation of Hongkong Land’s investment properties on the back of a weaker property market.
Despite the net loss, Hongkong Land’s cash flow from operating activities grew 42.8% year-on-year to US$722.5 million.
With capital expenditure coming in at US$50.1 million, the property outfit’s free cash flow for the latest period stood at US$672.4 million, an improvement from US$446.9 million posted last year.
Hongkong Land ended off the 2021 first-half period with a strong balance sheet. Net gearing stood at just 12% compared with 13% at the end of 2020.
As for its outlook for the 2021 second-half, Hongkong Land’s chairman Ben Keswick said:
“While higher second-half underlying profits are expected from the Group’s Development Properties business due to more sales completions on the Chinese mainland, overall conditions are expected to be similar to those of the first-half.”
Hongkong Land’s Dividend Sustainability
On top of looking at whether a company has a rock-solid balance sheet, we also need to look at its earnings growth and dividend payout ratio when analysing its dividend sustainability.
The dividend payout ratio tells investors what percentage of a company’s earnings are paid out yearly as a dividend.
The following shows Hongkong Land’s dividend, underlying earnings, and dividend payout ratio (in terms of underlying profit) since 2004:
Year Total dividend per share
Underlying earnings per share (US cents) Dividend payout ratio
2004 7.00 8.86 79%
2005 8.00 8.42 95%
2006 10.00 10.98 91%
2007 13.00 15.02 87%
2008 13.00 16.41 79%
2009 16.00 34.54 46%
2010 16.00 35.99 44%
2011 16.00 30.25 53%
2012 17.00 33.11 51%
2013 18.00 39.73 45%
2014 19.00 39.52 48%
2015 19.00 39.53 48%
2016 19.00 34.92 54%
2017 20.00 40.24 50%
2018 22.00 44.24 50%
2019 22.00 46.12 48%
2020 22.00 41.27 53%
2020 first-half 6.00 15.12 40%
2021 first-half 6.00 16.90 36%
With the overall growth in underlying earnings, Hongkong Land’s dividend has been increasing consistently as well, even during the global financial crisis of 2007 to 2008.
In all, Hongkong Land’s dividend grew by 7% annually from 2004 to 2020.
For the first half of 2021, Hongkong Land maintained its interim dividend of US$0.06 per share.
Throughout the years, the company has been conservative about its dividend payment, with the payout ratio hovering around 50% for the full year.
A dividend payout ratio of 50% gives Hongkong Land a sufficient margin of safety to protect its dividends.
Hongkong Land doesn’t have a fixed dividend policy, but it aims to increase its dividend per share over time as recurring earnings grow.
During Hongkong Land’s 2020 first-half earnings conference call, its chief financial officer, Simon Collier Dixon, said (emphasis is mine):
“I’d also add, I think, at this juncture that — and you’ll see from our interim dividend per share. And just to reiterate, and we’ve said this in the past, we are — management is strongly committed to a stable dividend when we’re thinking about overall capital management.”
The company reiterated its dividend stance when it announced a share buyback programme last month.
Hongkong Land will invest up to US$500 million in a share buyback exercise extending until 31 December 2022.
The purpose of the programme is to reduce the company’s capital and any shares repurchased will be cancelled.
Hongkong Land added that the buyback is in line with its long-standing capital allocation practice, which includes continued payment of steady and, over time, increasing dividends.
The 50% payout ratio helps to ensure that Hongkong Land can pay steady and increasing dividends for years to come, even with any headwind the company may face.
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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer doesn’t own shares in any companies mentioned.