Dividend paying stocks like China Development Bank Financial Leasing Co., Ltd. (HKG:1606) 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.
In this case, China Development Bank Financial Leasing pays a decent-sized 9.1% dividend yield, and has been distributing cash to shareholders for the past three years. A 9.1% yield does look good. Could the short payment history hint at future dividend growth? There are a few simple ways to reduce the risks of buying China Development Bank Financial Leasing for its dividend, and we’ll go through these below.
Explore this interactive chart for our latest analysis on China Development Bank Financial Leasing!
SEHK:1606 Historical Dividend Yield March 27th 2020
Payout ratios
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. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, China Development Bank Financial Leasing paid out 41% of its profit as dividends. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Plus, there is room to increase the payout ratio over time.
Remember, you can always get a snapshot of China Development Bank Financial Leasing’s latest financial position, by checking our visualisation of its financial health.
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 dividend has not fluctuated much, but with a relatively short payment history, we can’t be sure this is sustainable across a full market cycle. During the past three-year period, the first annual payment was CN¥0.056 in 2017, compared to CN¥0.089 last year. This works out to be a compound annual growth rate (CAGR) of approximately 17% a year over that time.
China Development Bank Financial Leasing has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. China Development Bank Financial Leasing’s EPS are effectively flat over the past five years. Flat earnings per share are acceptable for a time, but over the long term, the purchasing power of the company’s dividends could be eroded by inflation. A payout ratio below 50% leaves ample room to reinvest in the business, and provides finanical flexibility. However, earnings per share are unfortunately not growing much. Might this suggest that the company should pay a higher dividend instead?
Conclusion
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 China Development Bank Financial Leasing has a low and conservative payout ratio. Second, the company has not been able to generate earnings growth, and its history of dividend payments is shorter than we consider ideal (from a reliability perspective). In summary, we’re unenthused by China Development Bank Financial Leasing 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.
It’s important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we’ve picked out 3 warning signs for China Development Bank Financial Leasing that investors should take into consideration.
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 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.
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