Could Bank of Chongqing Co., Ltd. (HKG:1963) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the 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.
With a six-year payment history and a 4.0% yield, many investors probably find Bank of Chongqing intriguing. We’d agree the yield does look enticing. There are a few simple ways to reduce the risks of buying Bank of Chongqing for its dividend, and we’ll go through these below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. In the last year, Bank of Chongqing paid out 13% of its profit as dividends. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.
Remember, you can always get a snapshot of Bank of Chongqing’s latest financial position, by checking our visualisation of its financial health.
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. Bank of Chongqing has been paying a dividend for the past six years. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we’re cautious about the consistency of its dividend across a full economic cycle. During the past six-year period, the first annual payment was CN¥0.22 in 2014, compared to CN¥0.15 last year. The dividend has shrunk at around 6.1% a year during that period. Bank of Chongqing’s dividend hasn’t shrunk linearly at 6.1% per annum, but the CAGR is a useful estimate of the historical rate of change.
When a company’s per-share dividend falls we question if this reflects poorly on either external business conditions, or the company’s capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.
Dividend Growth Potential
With a relatively unstable dividend, and a poor history of shrinking dividends, it’s even more important to see if EPS are growing. Earnings have grown at around 2.3% a year for the past five years, which is better than seeing them shrink! So, we know earnings growth has been thin on the ground. On the plus side, the dividend payout ratio is low and dividends could grow faster than earnings, if the company decides to increase its payout ratio.
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 Bank of Chongqing has a low and conservative payout ratio. Second, earnings growth has been ordinary, and its history of dividend payments is chequered – having cut its dividend at least once in the past. While we’re not hugely bearish on it, overall we think there are potentially better dividend stocks than Bank of Chongqing out there.
See if management have their own wealth at stake, by checking insider shareholdings in Bank of Chongqing stock.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
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