Bank of Gansu Co., Ltd. (HKG:2139) Investors Should Think About This Before Buying It For Its Dividend

Dividend paying stocks like Bank of Gansu Co., Ltd. (HKG:2139) 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.

Bank of Gansu has only been paying a dividend for a year or so, so investors might be curious about its 8.2% yield. There are a few simple ways to reduce the risks of buying Bank of Gansu for its dividend, and we’ll go through these below.

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SEHK:2139 Historical Dividend Yield, March 11th 2020
SEHK:2139 Historical Dividend Yield, March 11th 2020

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. 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, Bank of Gansu paid out 95% of its profit as dividends. This is quite a high payout ratio that suggests the dividend is not well covered by earnings.

Consider getting our latest analysis on Bank of Gansu’s financial position here.

Dividend Volatility

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. With a payment history of less than 2 years, we think it’s a bit too soon to think about living on the income from its dividend. Its most recent annual dividend was CN„0.10 per share.

It’s good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn’t want to depend on this dividend too heavily.

Dividend Growth Potential

Examining whether the dividend is affordable and stable is important. However, it’s also important to assess if earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. While there may be fluctuations in the past , Bank of Gansu’s earnings per share have basically not grown from where they were five years ago. Over the long term, steady earnings per share is a risk as the value of the dividends can be reduced by inflation.

We’d also point out that Bank of Gansu issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental – it’s hard to grow dividends per share when new shares are regularly being created.

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. We’re a bit uncomfortable with its high payout ratio. Earnings per share are down, and to our mind Bank of Gansu has not been paying a dividend long enough to demonstrate its resilience across economic cycles. With any dividend stock, we look for a sustainable payout ratio, steady dividends, and growing earnings. Bank of Gansu has a few too many issues for us to get interested.

It’s important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we’ve picked out 2 warning signs for Bank of Gansu that investors should know about before committing capital to this stock.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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.