Dividend paying stocks like SINOPEC Engineering (Group) Co., Ltd. (HKG:2386) 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. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.
With a six-year payment history and a 5.4% yield, many investors probably find SINOPEC Engineering (Group) intriguing. We'd agree the yield does look enticing. Some simple analysis can reduce the risk of holding SINOPEC Engineering (Group) for its dividend, and we'll focus on the most important aspects below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, SINOPEC Engineering (Group) paid out 58% of its profit as dividends. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. SINOPEC Engineering (Group) paid out 57% of its free cash flow last year, which is acceptable, but is starting to limit the amount of earnings that can be reinvested into the business. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
With a strong net cash balance, SINOPEC Engineering (Group) investors may not have much to worry about in the near term from a dividend perspective.
We update our data on SINOPEC Engineering (Group) every 24 hours, so you can always get our latest analysis of its financial health, here.
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. Looking at the data, we can see that SINOPEC Engineering (Group) has been paying a dividend for the past six years. It's good to see that SINOPEC Engineering (Group) 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 six-year period, the first annual payment was CN¥0.27 in 2014, compared to CN¥0.22 last year. The dividend has shrunk at around 2.9% a year during that period. SINOPEC Engineering (Group)'s dividend has been cut sharply at least once, so it hasn't fallen by 2.9% every year, but this is a decent approximation of the long term change.
A shrinking dividend over a six-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.
Dividend Growth Potential
With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. SINOPEC Engineering (Group)'s EPS have fallen by approximately 16% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and SINOPEC Engineering (Group)'s earnings per share, which support the dividend, have been anything but stable.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. SINOPEC Engineering (Group)'s is paying out more than half its income as dividends, but at least the dividend is covered by both reported earnings and cashflow. Earnings per share are down, and SINOPEC Engineering (Group)'s dividend has been cut at least once in the past, which is disappointing. With this information in mind, we think SINOPEC Engineering (Group) may not be an ideal dividend stock.
Without at least some growth in earnings per share over time, the dividend will eventually come under pressure either from costs or inflation. See if the 9 analysts are forecasting a turnaround in our free collection of analyst estimates here.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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