Harbin Medisan Pharmaceutical (SZSE:002900) Will Pay A Larger Dividend Than Last Year At CN¥0.20

Harbin Medisan Pharmaceutical Co., Ltd. (SZSE:002900) has announced that it will be increasing its dividend from last year's comparable payment on the 5th of June to CN¥0.20. This takes the annual payment to 1.9% of the current stock price, which is about average for the industry.

Check out our latest analysis for Harbin Medisan Pharmaceutical

Harbin Medisan Pharmaceutical Doesn't Earn Enough To Cover Its Payments

We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Prior to this announcement, the dividend made up 116% of earnings, and the company was generating negative free cash flows. Paying out such a large dividend compared to earnings while also not generating free cash flows is a major warning sign for the sustainability of the dividend as these levels are certainly a bit high.

Looking forward, EPS could fall by 22.8% if the company can't turn things around from the last few years. Assuming the dividend continues along recent trends, we believe the payout ratio could reach 125%, which could put the dividend under pressure if earnings don't start to improve.

Harbin Medisan Pharmaceutical's Dividend Has Lacked Consistency

It's comforting to see that Harbin Medisan Pharmaceutical 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. The dividend has gone from an annual total of CN¥0.333 in 2018 to the most recent total annual payment of CN¥0.20. Doing the maths, this is a decline of about 8.2% per year. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.

The Dividend Has Limited Growth Potential

Given that the track record hasn't been stellar, we really want to see earnings per share growing over time. Harbin Medisan Pharmaceutical's earnings per share has shrunk at 23% a year over the past five years. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough.

We're Not Big Fans Of Harbin Medisan Pharmaceutical's Dividend

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.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Harbin Medisan Pharmaceutical has 4 warning signs (and 3 which don't sit too well with us) we think you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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