A large part of investment returns can be generated by dividend-paying stock given their role in compounding returns over time. Historically, China Life Insurance Company Limited (HKG:2628) has paid a dividend to shareholders. It currently yields 2.8%. Does China Life Insurance tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.
5 questions I ask before picking a dividend stock
When researching a dividend stock, I always follow the following screening criteria:
- Is its annual yield among the top 25% of dividend-paying companies?
- Does it consistently pay out dividends without missing a payment of significantly cutting payout?
- Has dividend per share risen in the past couple of years?
- Can it afford to pay the current rate of dividends from its earnings?
- Will it be able to continue to payout at the current rate in the future?
How does China Life Insurance fare?
The current trailing twelve-month payout ratio for the stock is 46%, meaning the dividend is sufficiently covered by earnings. However, going forward, analysts expect 2628’s payout to fall to 36% of its earnings. Assuming a constant share price, this equates to a dividend yield of 3.0%. However, EPS should increase to CN¥1.29, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.
When considering the sustainability of dividends, it is also worth checking the cash flow of a company. A business with strong cash flow can sustain a higher divided payout ratio than a company with weak cash flow.
If dividend is a key criteria in your investment consideration, then you need to make sure the dividend stock you’re eyeing out is reliable in its payments. Not only have dividend payouts from China Life Insurance fallen over the past 10 years, it has also been highly volatile during this time, with drops of over 25% in some years. These characteristics do not bode well for income investors seeking reliable stream of dividends.
In terms of its peers, China Life Insurance produces a yield of 2.8%, which is high for Insurance stocks but still below the market’s top dividend payers.
Taking all the above into account, China Life Insurance is a complicated pick for dividend investors given that there are a couple of positive things about it as well as negative. But if you are not exclusively a dividend investor, the stock could still be an interesting investment opportunity. Given that this is purely a dividend analysis, you should always research extensively before deciding whether or not a stock is an appropriate investment for you. I always recommend analysing the company’s fundamentals and underlying business before making an investment decision. I’ve put together three relevant aspects you should further examine:
- Future Outlook: What are well-informed industry analysts predicting for 2628’s future growth? Take a look at our free research report of analyst consensus for 2628’s outlook.
- Valuation: What is 2628 worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 2628 is currently mispriced by the market.
- Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.