Poly Plastic Masterbatch (SuZhou)Ltd (SZSE:300905) Has Announced That It Will Be Increasing Its Dividend To CN¥0.50

Poly Plastic Masterbatch (SuZhou) Co.,Ltd (SZSE:300905) has announced that it will be increasing its dividend from last year's comparable payment on the 6th of May to CN¥0.50. Although the dividend is now higher, the yield is only 1.6%, which is below 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 Poly Plastic Masterbatch (SuZhou)Ltd's stock price has increased by 113% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.

Check out our latest analysis for Poly Plastic Masterbatch (SuZhou)Ltd

Poly Plastic Masterbatch (SuZhou)Ltd's Payment Has Solid Earnings Coverage

Even a low dividend yield can be attractive if it is sustained for years on end. The last dividend made up quite a large portion of free cash flows, and this was made worse by the lack of free cash flows. Generally, we think that this would be a risky long term practice.

Unless the company can turn things around, EPS could fall by 7.3% over the next year. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 72%, which is definitely feasible to continue.

Poly Plastic Masterbatch (SuZhou)Ltd's Dividend Has Lacked Consistency

The track record isn't the longest, but we are already seeing a bit of instability in the payments. The most recent annual payment of CN¥0.50 is about the same as the annual payment 3 years ago. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

Dividend Growth Is Doubtful

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. Poly Plastic Masterbatch (SuZhou)Ltd has seen earnings per share falling at 7.3% per year over the last five years. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends.

An additional note is that the company has been raising capital by issuing stock equal to 22% of shares outstanding in the last 12 months. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

The Dividend Could Prove To Be Unreliable

In summary, while it's always good to see the dividend being raised, we don't think Poly Plastic Masterbatch (SuZhou)Ltd's payments are rock solid. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We would probably look elsewhere for an income investment.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've identified 4 warning signs for Poly Plastic Masterbatch (SuZhou)Ltd (2 can't be ignored!) that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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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.