It looks like China New Higher Education Group Limited (HKG:2001) is about to go ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 21st of May will not receive this dividend, which will be paid on the 5th of June.
China New Higher Education Group's next dividend payment will be HK$0.035 per share. Last year, in total, the company distributed HK$0.068 to shareholders. Last year's total dividend payments show that China New Higher Education Group has a trailing yield of 1.7% on the current share price of HK$4.32. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether China New Higher Education Group can afford its dividend, and if the dividend could grow.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. That's why it's good to see China New Higher Education Group paying out a modest 27% of its earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out 17% of its free cash flow as dividends last year, which is conservatively low.
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.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see China New Higher Education Group has grown its earnings rapidly, up 39% a year for the past three years. Earnings per share have been growing very quickly, and the company is paying out a relatively low percentage of its profit and cash flow. Companies with growing earnings and low payout ratios are often the best long-term dividend stocks, as the company can both grow its earnings and increase the percentage of earnings that it pays out, essentially multiplying the dividend.
We'd also point out that China New Higher Education Group issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. China New Higher Education Group has delivered 17% dividend growth per year on average over the past three years. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
Has China New Higher Education Group got what it takes to maintain its dividend payments? China New Higher Education Group has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past three years, but the conservative payout ratio makes the current dividend look sustainable. There's a lot to like about China New Higher Education Group, and we would prioritise taking a closer look at it.
While it's tempting to invest in China New Higher Education Group for the dividends alone, you should always be mindful of the risks involved. Case in point: We've spotted 2 warning signs for China New Higher Education Group you should be aware of.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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