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Is Guotai Junan International Holdings Limited (HKG:1788) A Smart Pick For Income Investors?

Simply Wall St

Dividend paying stocks like Guotai Junan International Holdings Limited (HKG:1788) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

With a goodly-sized dividend yield despite a relatively short payment history, investors might be wondering if Guotai Junan International Holdings is a new dividend aristocrat in the making. It sure looks interesting on these metrics - but there's always more to the story . The company also bought back stock equivalent to around 3.2% of market capitalisation this year. Some simple research can reduce the risk of buying Guotai Junan International Holdings for its dividend - read on to learn more.

Click the interactive chart for our full dividend analysis

SEHK:1788 Historical Dividend Yield, January 12th 2020

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 51% of Guotai Junan International Holdings's profits were paid out as dividends in the last 12 months. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.

Consider getting our latest analysis on Guotai Junan International Holdings's financial position here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. The first recorded dividend for Guotai Junan International Holdings, in the last decade, was nine years ago. It's good to see that Guotai Junan International Holdings has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past nine-year period, the first annual payment was HK$0.013 in 2011, compared to HK$0.062 last year. This works out to be a compound annual growth rate (CAGR) of approximately 19% a year over that time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

So, its dividends have grown at a rapid rate over this time, but payments have been cut in the past. The stock may still be worth considering as part of a diversified dividend portfolio.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Guotai Junan International Holdings has grown its earnings per share at 3.2% per annum over the past five years. Growth of 3.2% is relatively anaemic growth, which we wonder about. When a business is not growing, it often makes more sense to pay higher dividends to shareholders rather than retain the cash with no way to utilise it.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. First, we think Guotai Junan International Holdings has an acceptable payout ratio. Second, earnings growth has been ordinary, and its history of dividend payments is chequered - having cut its dividend at least once in the past. In summary, we're unenthused by Guotai Junan International Holdings as a dividend stock. It's not that we think it is a bad company; it simply falls short of our criteria in some key areas.

Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 3 analysts we track are forecasting for Guotai Junan International Holdings for free with public analyst estimates for the company.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.