Huarong Chemical's (SZSE:301256) Dividend Will Be Increased To CN¥0.20

Huarong Chemical Co., Ltd. (SZSE:301256) has announced that it will be increasing its dividend from last year's comparable payment on the 27th of May to CN¥0.20. Based on this payment, the dividend yield for the company will be 2.7%, which is fairly typical for the industry.

View our latest analysis for Huarong Chemical

Huarong Chemical's Dividend Is Well Covered By Earnings

We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. 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. This is a pretty unsustainable practice, and could be risky if continued for the long term.

Over the next year, EPS could expand by 3.1% if the company continues along the path it has been on recently. If recent patterns in the dividend continue, the payout ratio in 12 months could be 76% which is a bit high but can definitely be sustainable.

Huarong Chemical Is Still Building Its Track Record

Looking back, the dividend has been stable, but the company hasn't been paying a dividend for very long so we can't be confident that the dividend will remain stable through all economic environments. Since 2022, the annual payment back then was CN¥0.05, compared to the most recent full-year payment of CN¥0.20. This works out to be a compound annual growth rate (CAGR) of approximately 100% a year over that time. The dividend has been growing rapidly, however with such a short payment history we can't know for sure if payment can continue to grow over the long term, so caution may be warranted.

The Dividend's Growth Prospects Are Limited

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Earnings has been rising at 3.1% per annum over the last five years, which admittedly is a bit slow. Earnings are not growing quickly at all, and the company is paying out most of its profit as dividends. When the rate of return on reinvestment opportunities falls below a certain minimum level, companies often elect to pay a larger dividend instead. This is why many mature companies often have larger dividend yields.

The Dividend Could Prove To Be Unreliable

Overall, we always like to see the dividend being raised, but we don't think Huarong Chemical will make a great income stock. The track record isn't great, and the payments are a bit high to be considered sustainable. 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. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Case in point: We've spotted 2 warning signs for Huarong Chemical (of which 1 makes us a bit uncomfortable!) you should know about. Is Huarong Chemical not quite the opportunity you were looking for? Why not check out our selection of top 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.