Huaming Power EquipmentLtd (SZSE:002270) Is Increasing Its Dividend To CN¥0.55

The board of Huaming Power Equipment Co.,Ltd (SZSE:002270) has announced that it will be paying its dividend of CN¥0.55 on the 27th of May, an increased payment from last year's comparable dividend. This takes the dividend yield to 3.9%, which shareholders will be pleased with.

While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Investors will be pleased to see that Huaming Power EquipmentLtd's stock price has increased by 35% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.

See our latest analysis for Huaming Power EquipmentLtd

Huaming Power EquipmentLtd Is Paying Out More Than It Is Earning

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Based on the last payment, the company wasn't making enough to cover what it was paying to shareholders. This situation certainly isn't ideal, and could place significant strain on the balance sheet if it continues.

Earnings per share is forecast to rise by 70.1% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could reach 105%, which probably can't continue without putting some pressure on the balance sheet.

Huaming Power EquipmentLtd's Dividend Has Lacked Consistency

Looking back, Huaming Power EquipmentLtd's dividend hasn't been particularly consistent. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. The annual payment during the last 8 years was CN¥0.0533 in 2016, and the most recent fiscal year payment was CN¥0.82. This works out to be a compound annual growth rate (CAGR) of approximately 41% a year over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

Huaming Power EquipmentLtd Might Find It Hard To Grow Its Dividend

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Huaming Power EquipmentLtd has seen EPS rising for the last five years, at 22% per annum. While EPS is growing rapidly, Huaming Power EquipmentLtd paid out a very high 132% of its income as dividends. If earnings continue to grow, this dividend may be sustainable, but we think a payout this high definitely bears watching.

Huaming Power EquipmentLtd's Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think Huaming Power EquipmentLtd's payments are rock solid. Strong earnings growth means Huaming Power EquipmentLtd has the potential to be a good dividend stock in the future, despite the current payments being at elevated levels. We would probably look elsewhere for an income investment.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 1 warning sign for Huaming Power EquipmentLtd that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.