Fanhua Inc.'s (NASDAQ:FANH) dividend is being reduced to US$0.14 on the 25th of June. The dividend yield of 6.4% is still a nice boost to shareholder returns, despite the cut.
Fanhua's Earnings Easily Cover the Distributions
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Prior to this announcement, Fanhua's dividend made up quite a large proportion of earnings but only 62% of free cash flows. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.
Over the next year, EPS could expand by 14.5% if recent trends continue. If the dividend continues along recent trends, we estimate the payout ratio will be 15%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.
The company has a long dividend track record, but it doesn't look great with cuts in the past. The dividend has gone from CN¥1.74 in 2011 to the most recent annual payment of CN¥3.82. This implies that the company grew its distributions at a yearly rate of about 8.2% over that duration. A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.
Dividend Growth Could Be Constrained
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. Fanhua has seen EPS rising for the last five years, at 15% per annum. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.
In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would probably look elsewhere for an income investment.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 1 warning sign for Fanhua that investors should know about before committing capital to this stock. We have also put together a list of global stocks with a solid dividend.
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