Guizhou Chanhen Chemical's (SZSE:002895) Shareholders Will Receive A Bigger Dividend Than Last Year

Guizhou Chanhen Chemical Corporation (SZSE:002895) will increase its dividend from last year's comparable payment on the 16th of May to CN¥1.00. This makes the dividend yield 4.5%, which is above the industry average.

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 Guizhou Chanhen Chemical's stock price has increased by 36% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.

View our latest analysis for Guizhou Chanhen Chemical

Guizhou Chanhen Chemical's Earnings Easily Cover The Distributions

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Based on the last payment, Guizhou Chanhen Chemical's earnings were much higher than the dividend, but it wasn't converting those earnings into cash flow. No cash flows could definitely make returning cash to shareholders difficult, or at least mean the balance sheet will come under pressure.

The next year is set to see EPS grow by 112.6%. If the dividend continues on this path, the payout ratio could be 41% by next year, which we think can be pretty sustainable going forward.

Guizhou Chanhen Chemical's Dividend Has Lacked Consistency

Guizhou Chanhen Chemical has been paying dividends for a while, but the track record isn't stellar. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. The dividend has gone from an annual total of CN¥0.15 in 2018 to the most recent total annual payment of CN¥1.00. This implies that the company grew its distributions at a yearly rate of about 37% over that duration. 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.

The Dividend Looks Likely To Grow

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It's encouraging to see that Guizhou Chanhen Chemical has been growing its earnings per share at 48% a year over the past five years. Guizhou Chanhen Chemical is clearly able to grow rapidly while still returning cash to shareholders, positioning it to become a strong dividend payer in the future.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We don't think Guizhou Chanhen Chemical is a great stock to add to your portfolio if income is your focus.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 2 warning signs for Guizhou Chanhen Chemical that you should be aware of before investing. 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.