Is SINOPEC Engineering (Group) Co., Ltd. (HKG:2386) At Risk Of Cutting Its Dividend?

Is SINOPEC Engineering (Group) Co., Ltd. (HKG:2386) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

With a seven-year payment history and a 9.1% yield, many investors probably find SINOPEC Engineering (Group) intriguing. It sure looks interesting on these metrics - but there's always more to the story . Remember though, given the recent drop in its share price, SINOPEC Engineering (Group)'s yield will look higher, even though the market may now be expecting a decline in its long-term prospects. Some simple research can reduce the risk of buying SINOPEC Engineering (Group) for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on SINOPEC Engineering (Group)!

Payout ratios

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, SINOPEC Engineering (Group) paid out 58% of its profit as dividends. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. SINOPEC Engineering (Group) paid out 57% of its free cash flow last year, which is acceptable, but is starting to limit the amount of earnings that can be reinvested into the business. It's positive to see that SINOPEC Engineering (Group)'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.

While the above analysis focuses on dividends relative to a company's earnings, we do note SINOPEC Engineering (Group)'s strong net cash position, which will let it pay larger dividends for a time, should it choose.

Remember, you can always get a snapshot of SINOPEC Engineering (Group)'s latest financial position, by checking our visualisation of its financial health.

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. SINOPEC Engineering (Group) has been paying a dividend for the past seven 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 seven-year period, the first annual payment was CN¥0.27 in 2013, compared to CN¥0.22 last year. The dividend has shrunk at around 2.5% a year during that period. SINOPEC Engineering (Group)'s dividend has been cut sharply at least once, so it hasn't fallen by 2.5% every year, but this is a decent approximation of the long term change.

We struggle to make a case for buying SINOPEC Engineering (Group) for its dividend, given that payments have shrunk over the past seven years.

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. SINOPEC Engineering (Group)'s EPS have fallen by approximately 16% per year during the past five years. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

Conclusion

To summarise, shareholders should always check that SINOPEC Engineering (Group)'s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think SINOPEC Engineering (Group) is paying out an acceptable percentage of its cashflow and profit. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In summary, SINOPEC Engineering (Group) has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.

Market movements attest to how highly valued a consistent dividend policy is to one to which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 2 warning signs for SINOPEC Engineering (Group) that investors should know about before committing capital to this stock.

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.