Sichuan Guoguang Agrochemical (SZSE:002749) Has Announced A Dividend Of CN¥0.25

Sichuan Guoguang Agrochemical Co., Ltd. (SZSE:002749) will pay a dividend of CN¥0.25 on the 29th of May. This will take the dividend yield to an attractive 3.4%, providing a nice boost to shareholder returns.

Check out our latest analysis for Sichuan Guoguang Agrochemical

Sichuan Guoguang Agrochemical's Payment Has Solid Earnings Coverage

A big dividend yield for a few years doesn't mean much if it can't be sustained. Before making this announcement, Sichuan Guoguang Agrochemical's was paying out quite a large proportion of earnings and 77% of free cash flows. This is usually an indication that the focus of the company is returning cash to shareholders rather than reinvesting it for growth.

Looking forward, earnings per share is forecast to rise by 62.9% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 49%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Sichuan Guoguang Agrochemical's Dividend Has Lacked Consistency

Even in its relatively short history, the company has reduced the dividend at least once. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2015, the dividend has gone from CN¥0.141 total annually to CN¥0.55. This works out to be a compound annual growth rate (CAGR) of approximately 16% a year over that time. Sichuan Guoguang Agrochemical 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.

We Could See Sichuan Guoguang Agrochemical's Dividend Growing

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. Sichuan Guoguang Agrochemical has impressed us by growing EPS at 5.5% per year over the past five years. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.

Our Thoughts On Sichuan Guoguang Agrochemical's Dividend

In summary, while it's always good to see the dividend being raised, we don't think Sichuan Guoguang Agrochemical's payments are rock solid. The payments are bit high to be considered sustainable, and the track record isn't the best. We would probably look elsewhere for an income investment.

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. For example, we've picked out 1 warning sign for Sichuan Guoguang Agrochemical that investors should know about before committing capital to this stock. 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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