Dividend paying stocks like Guolian Securities Co., Ltd. (HKG:1456) 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 only a three-year payment history, and a 2.3% yield, investors probably think Guolian Securities is not much of a dividend stock. A low dividend might not be a bad thing, if the company is reinvesting heavily and growing its sales and profits. There are a few simple ways to reduce the risks of buying Guolian Securities for its dividend, and we'll go through these below.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Guolian Securities paid out 35% of its profit as dividends, over the trailing twelve month period. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.
Remember, you can always get a snapshot of Guolian Securities's latest financial position, by checking our visualisation of its financial health.
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. This company's dividend has been unstable, and with a relatively short history, we think it's a little soon to draw strong conclusions about its long term dividend potential. During the past three-year period, the first annual payment was CN¥0.40 in 2016, compared to CN¥0.05 last year. Dividend payments have fallen sharply, down 88% over that time.
We struggle to make a case for buying Guolian Securities for its dividend, given that payments have shrunk over the past three years.
Dividend Growth Potential
With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. In the last five years, Guolian Securities's earnings per share have shrunk at approximately 3.4% per annum. A modest decline in earnings per share is not great to see, but it doesn't automatically make a dividend unsustainable. Still, we'd vastly prefer to see EPS growth when researching dividend stocks.
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. Firstly, we like that Guolian Securities has a low and conservative payout ratio. Earnings per share are down, and Guolian Securities's dividend has been cut at least once in the past, which is disappointing. In summary, we're unenthused by Guolian Securities 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.
Are management backing themselves to deliver performance? Check their shareholdings in Guolian Securities in our latest insider ownership analysis.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
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