Dividend paying stocks like Zhengzhou Coal Mining Machinery Group Company Limited (HKG:564) 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. 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.
Investors might not know much about Zhengzhou Coal Mining Machinery Group’s dividend prospects, even though it has been paying dividends for the last seven years and offers a 2.9% yield. While the yield may not look too great, the relatively long payment history is interesting. That said, the recent jump in the share price will make Zhengzhou Coal Mining Machinery Group’s dividend yield look smaller, even though the company prospects could be improving. Before you buy any stock for its dividend however, you should always remember Warren Buffett’s two rules: 1) Don’t lose money, and 2) Remember rule #1. We’ll run through some checks below to help with this.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Zhengzhou Coal Mining Machinery Group paid out 22% of its profit as dividends, over the trailing twelve month period. With a low payout ratio, it looks like the dividend is comprehensively covered by earnings.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Zhengzhou Coal Mining Machinery Group paid out 55% of its cash flow as dividends last year, which is within a reasonable range for the average corporation. It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
With a strong net cash balance, Zhengzhou Coal Mining Machinery Group investors may not have much to worry about in the near term from a dividend perspective.
Remember, you can always get a snapshot of Zhengzhou Coal Mining Machinery Group’s latest financial position, by checking our visualisation of its financial health.
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. Looking at the data, we can see that Zhengzhou Coal Mining Machinery Group has been paying a dividend for the past seven years. It’s good to see that Zhengzhou Coal Mining Machinery Group has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we’re concerned that what has been cut once, could be cut again. During the past seven-year period, the first annual payment was CN¥0.3 in 2013, compared to CN¥0.2 last year. This works out to be a decline of approximately 6.7% per year over that time. Zhengzhou Coal Mining Machinery Group’s dividend hasn’t shrunk linearly at 6.7% per annum, but the CAGR is a useful estimate of the historical rate of change.
A shrinking dividend over a seven-year period is not ideal, and we’d be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.
Dividend Growth Potential
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Zhengzhou Coal Mining Machinery Group has grown its earnings per share at 45% per annum over the past five years. The company is only paying out a fraction of its earnings as dividends, and in the past been able to use the retained earnings to grow its profits rapidly – an ideal combination.
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. Zhengzhou Coal Mining Machinery Group’s dividend payout ratios are within normal bounds, although we note its cash flow is not as strong as the income statement would suggest. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. Zhengzhou Coal Mining Machinery Group has a number of positive attributes, but it falls slightly short of our (admittedly high) standards. Were there evidence of a strong moat or an attractive valuation, it could still be well worth a look.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. As an example, we’ve identified 2 warning signs for Zhengzhou Coal Mining Machinery Group that you should be aware of before investing.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
If you’re looking to trade Zhengzhou Coal Mining Machinery Group, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email email@example.com.