Chow Tai Fook’s Dividend: Can It Go Higher?

Chow Tai Fook Jewellery Group (SEHK: 1929) is one of the largest jewellery chains in the world. Founded in 1929, the company has built, over the years, an extensive retail network that stretches across Hong Kong, Mainland China, and elsewhere.

Due to strong growth, its shares trended higher from the beginning of 2016 to the middle of 2018. However, this reversed around the time when the trade tensions between China and the US began. They have been consolidating in a wide band ever since.

Given the secular winds powering Chow Tai Fook’s (CTF) results such as a growing and increasingly wealthier Chinese middle class, is the stock a buy and its dividend go higher?

Dividend data

In terms of normal dividends, CTF’s earnings per share (EPS) covers its payouts. The company’s normal dividend has also increased over the past three fiscal years ending in FY2019.

In terms of dividends with the special dividend included, however, CTF’s earnings don’t cover the total dividends aside from FY2015. The company’s total dividends have also fluctuated over the past five years.

Chow Tai Fook Dividends (all prices are in HK$)

FY2015 FY2016 FY2017 FY2018 FY2019
Normal Dividend 0.28 0.16 0.16 0.27 0.35
Special Dividend N/A 0.64 0.35 0.30 0.30
Total Dividend 0.28 0.80 0.51 0.57 0.65
Total EPS 0.55 0.29 0.31 0.41 0.46

Source: Chow Tai Fook Investor Relations

First half FY2020 results

For the six months ended 30 September, which is CTF’s first half fiscal year 2020 (FY2020), the jeweller’s results suffered as a result of the Hong Kong protests.

Because many tourists shied away from visiting Hong Kong altogether, less people have frequented CTF’s Hong Kong shops. As a result, same store sales for the company’s Hong Kong and Macau stores fell 27.5% year-on-year for the first half. By comparison, same store sales in Hong Kong and Macau rose 8.7% year-on-year to FY2019.

For a company, the decline in the city is hurting. Although Mainland China accounts for around two-thirds of its sales, Hong Kong is still its second-largest market.

As a result of the weakness in Hong Kong, CTF’s basic EPS fell 20.8% year-on-year to HK$0.15. The company’s interim dividend also fell to HK$0.12 per share from HK$0.15.

Because the protests in Hong Kong really only gained momentum in June, the jeweller’s first half 2020 results didn’t fully reflect the impacts of the protests. If the protests get worse or continue at their present levels for another six months or so, CTF’s second-half results in Hong Kong could be worse in terms of the year-on-year metrics.

Foolish verdict

Because CTF’s total dividend has been higher than its EPS for several years, the company’s total dividend payout might not increase in the near term given the negative effects of the Hong Kong protests.

Once the protests end, however, it has a good chance at increasing its normal dividend given the firm’s pre-protest EPS growth trends.

Chow Tai Fook shares trade near value territory with a price to FY2019 earnings ratio of around 15.6. With the secular rise of Chinese incomes, demand for luxury goods in China will increase. If management executes well, CTF’s operations should benefit from that trend with more growth. The stock, I feel, is a great buy in the long run.

In the near term though, its total dividend might not increase much (if at all) because of the protests.