There's A Lot To Like About China Telecom Corporation Limited's (HKG:728) Upcoming CN¥0.13 Dividend
China Telecom Corporation Limited (HKG:728) stock is about to trade ex-dividend in 4 days time. This means that investors who purchase shares on or after the 1st of June will not receive the dividend, which will be paid on the 31st of July.
China Telecom's next dividend payment will be HK$0.13 per share, which looks like a nice increase on last year, when the company distributed a total of HK$0.11 to shareholders. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
See our latest analysis for China Telecom
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately China Telecom's payout ratio is modest, at just 44% of profit. A useful secondary check can be to evaluate whether China Telecom generated enough free cash flow to afford its dividend. It paid out 24% of its free cash flow as dividends last year, which is conservatively low.
It's positive to see that China Telecom's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see China Telecom earnings per share are up 3.0% per annum over the last five years. Earnings per share growth in recent times has not been a standout. Yet there are several ways to grow the dividend, and one of them is simply that the company may choose to pay out more of its earnings as dividends.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. China Telecom has delivered 4.3% dividend growth per year on average over the past ten years. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
The Bottom Line
Is China Telecom an attractive dividend stock, or better left on the shelf? Earnings per share have been growing moderately, and China Telecom is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and China Telecom is halfway there. China Telecom looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
While it's tempting to invest in China Telecom for the dividends alone, you should always be mindful of the risks involved. For example - China Telecom has 1 warning sign we think 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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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.
