Three Things You Should Check Before Buying Guangzhou Baiyunshan Pharmaceutical Holdings Company Limited (HKG:874) For Its Dividend
Today we'll take a closer look at Guangzhou Baiyunshan Pharmaceutical Holdings Company Limited (HKG:874) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. 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.
A slim 1.9% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Guangzhou Baiyunshan Pharmaceutical Holdings could have potential. Some simple research can reduce the risk of buying Guangzhou Baiyunshan Pharmaceutical Holdings for its dividend - read on to learn more.
Payout ratios
Dividends are usually paid out of company earnings. If a company is paying more than it earns, 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. Guangzhou Baiyunshan Pharmaceutical Holdings paid out 22% of its profit as dividends, over the trailing twelve month period. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Guangzhou Baiyunshan Pharmaceutical Holdings paid out 110% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. Guangzhou Baiyunshan Pharmaceutical Holdings paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough free cash flow to cover the dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to Guangzhou Baiyunshan Pharmaceutical Holdings's ability to maintain its dividend.
While the above analysis focuses on dividends relative to a company's earnings, we do note Guangzhou Baiyunshan Pharmaceutical Holdings's strong net cash position, which will let it pay larger dividends for a time, should it choose.
We update our data on Guangzhou Baiyunshan Pharmaceutical Holdings every 24 hours, so you can always get our latest analysis of its financial health, here.
Dividend Volatility
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Guangzhou Baiyunshan Pharmaceutical Holdings has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have declined on at least one occasion over the past ten years. During the past ten-year period, the first annual payment was CN¥0.04 in 2010, compared to CN¥0.42 last year. Dividends per share have grown at approximately 27% per year over this time. Guangzhou Baiyunshan Pharmaceutical Holdings's dividend payments have fluctuated, so it hasn't grown 27% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.
It's not great to see that the payment has been cut in the past. We're generally more wary of companies that have cut their dividend before, as they tend to perform worse in an economic downturn.
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. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Guangzhou Baiyunshan Pharmaceutical Holdings has grown its earnings per share at 20% per annum over the past five years. Earnings per share have grown rapidly, and the company is retaining a majority of its earnings. We think this is ideal from an investment perspective, if the company is able to reinvest these earnings effectively.
Conclusion
Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Guangzhou Baiyunshan Pharmaceutical Holdings has a low payout ratio, which we like, although it paid out virtually all of its generated cash. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. Ultimately, Guangzhou Baiyunshan Pharmaceutical Holdings comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 6 Guangzhou Baiyunshan Pharmaceutical Holdings analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
