Could Nanjing Sample Technology Company Limited (HKG:1708) 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.
A 1.7% yield is nothing to get excited about, but investors probably think the long payment history suggests Nanjing Sample Technology has some staying power. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.
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. Looking at the data, we can see that 41% of Nanjing Sample Technology’s profits were paid out as dividends in the last 12 months. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. Nanjing Sample Technology paid out 362% of its free cash flow last year, which we think is concerning if cash flows do not improve. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely. Nanjing Sample Technology paid out less in dividends than it reported in profits, but unfortunately it didn’t generate enough free cash flow to cover the dividend. Cash is king, as they say, and were Nanjing Sample Technology to repeatedly pay dividends that aren’t well covered by cashflow, we would consider this a warning sign.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Nanjing Sample Technology has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut by more than 20% on at least one occasion historically. During the past ten-year period, the first annual payment was CN¥0.04 in 2010, compared to CN¥0.10 last year. Dividends per share have grown at approximately 9.6% per year over this time. Nanjing Sample Technology’s dividend payments have fluctuated, so it hasn’t grown 9.6% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.
A reasonable rate of dividend growth is good to see, but we’re wary that the dividend history is not as solid as we’d like, having been cut at least once.
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. Nanjing Sample Technology’s earnings per share have been essentially flat over the past five years. Over the long term, steady earnings per share is a risk as the value of the dividends can be reduced by inflation. A payout ratio below 50% leaves ample room to reinvest in the business, and provides finanical flexibility. Earnings per share growth have grown slowly, which is not great, but if the retained earnings can be reinvested effectively, future growth may be stronger.
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. Nanjing Sample Technology has a low payout ratio, which we like, although it paid out virtually all of its generated cash. Unfortunately, the company has not been able to generate earnings growth, and 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 Nanjing Sample Technology out there.
See if management have their own wealth at stake, by checking insider shareholdings in Nanjing Sample Technology stock.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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