Xinyu Iron & Steel (SHSE:600782) Has Announced That It Will Be Increasing Its Dividend To CN¥0.15

Xinyu Iron & Steel Co., Ltd's (SHSE:600782) dividend will be increasing from last year's payment of the same period to CN¥0.15 on 3rd of July. This will take the annual payment to 4.5% of the stock price, which is above what most companies in the industry pay.

Check out our latest analysis for Xinyu Iron & Steel

Xinyu Iron & Steel's Payment Has Solid Earnings Coverage

A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, the dividend made up 189% of earnings, and the company was generating negative free cash flows. Paying out such a large dividend compared to earnings while also not generating any free cash flow would definitely be difficult to keep up.

Analysts expect a massive rise in earnings per share in the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 38%, which would make us comfortable with the dividend's sustainability, despite the levels currently being elevated.

Xinyu Iron & Steel's Dividend Has Lacked Consistency

It's comforting to see that Xinyu Iron & Steel has been paying a dividend for a number of years now, however it has been cut at least once in that time. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. Since 2016, the annual payment back then was CN¥0.015, compared to the most recent full-year payment of CN¥0.15. This works out to be a compound annual growth rate (CAGR) of approximately 33% a year over that time. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.

The Dividend Has Limited Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Xinyu Iron & Steel's earnings per share has shrunk at 47% a year over the past five years. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this becomes a long term trend.

Xinyu Iron & Steel's Dividend Doesn't Look Great

Overall, while the dividend being raised can be good, there are some concerns about its long term sustainability. The company's earnings aren't high enough to be making such big distributions, and it isn't backed up by strong growth or consistency either. The dividend doesn't inspire confidence that it will provide solid income in the future.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Xinyu Iron & Steel has 2 warning signs (and 1 which is a bit concerning) we think you should know about. 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.

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