Sinomach Precision Industry Group (SZSE:002046) Is Paying Out A Larger Dividend Than Last Year

The board of Sinomach Precision Industry Group Co., Ltd. (SZSE:002046) has announced that it will be paying its dividend of CN¥0.20 on the 13th of June, an increased payment from last year's comparable dividend. The payment will take the dividend yield to 1.8%, which is in line with the average for the industry.

See our latest analysis for Sinomach Precision Industry Group

Sinomach Precision Industry Group's Payment Has Solid Earnings Coverage

We aren't too impressed by dividend yields unless they can be sustained over time. Prior to this announcement, Sinomach Precision Industry Group's dividend was only 39% of earnings, however it was paying out 165% of free cash flows. The business might be trying to strike a balance between returning cash to shareholders and reinvesting back into the business, but this high of a payout ratio could definitely force the dividend to be cut if the company runs into a bit of a tough spot.

Over the next year, EPS could expand by 44.0% if recent trends continue. If the dividend continues along recent trends, we estimate the payout ratio will be 34%, which is in the range that makes us comfortable with the sustainability of the dividend.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The annual payment during the last 10 years was CN¥0.03 in 2014, and the most recent fiscal year payment was CN¥0.20. This means that it has been growing its distributions at 21% per annum over that time. Sinomach Precision Industry Group has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

The Dividend Looks Likely To Grow

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's encouraging to see that Sinomach Precision Industry Group has been growing its earnings per share at 44% a year over the past five years. Earnings per share is growing at a solid clip, and the payout ratio is low which we think is an ideal combination in a dividend stock as the company can quite easily raise the dividend in the future.

Our Thoughts On Sinomach Precision Industry Group's Dividend

Overall, we always like to see the dividend being raised, but we don't think Sinomach Precision Industry Group will make a great income stock. While Sinomach Precision Industry Group is earning enough to cover the payments, the cash flows are lacking. Overall, we don't think this company has the makings of a good income stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 2 warning signs for Sinomach Precision Industry Group that investors should take into consideration. Is Sinomach Precision Industry Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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