Guangzhou Automobile Group (HKG:2238) Is Due To Pay A Dividend Of CN¥0.1099

Guangzhou Automobile Group Co., Ltd. (HKG:2238) has announced that it will pay a dividend of CN¥0.1099 per share on the 21st of June. However, the dividend yield of 4.9% is still a decent boost to shareholder returns.

View our latest analysis for Guangzhou Automobile Group

Guangzhou Automobile Group's Dividend Is Well Covered By Earnings

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Guangzhou Automobile Group is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. With the company not bringing in any cash, paying out to shareholders is bound to become difficult at some point.

The next year is set to see EPS grow by 38.9%. If the dividend continues along recent trends, we estimate the payout ratio will be 32%, which is in the range that makes us comfortable with the sustainability of the dividend.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The annual payment during the last 10 years was CN¥0.0459 in 2014, and the most recent fiscal year payment was CN¥0.15. This implies that the company grew its distributions at a yearly rate of about 13% 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.

Dividend Growth Potential Is Shaky

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. Over the past five years, it looks as though Guangzhou Automobile Group's EPS has declined at around 16% a year. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

Guangzhou Automobile Group's Dividend Doesn't Look Sustainable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We don't think Guangzhou Automobile Group is a great stock to add to your portfolio if income is your focus.

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 picked out 2 warning signs for Guangzhou Automobile Group that investors should know about before committing capital to this stock. Is Guangzhou Automobile Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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