Bank of Chongqing Co., Ltd. (HKG:1963) has announced that it will be increasing its dividend on the 9th of July to HK$0.45. This will take the dividend yield to an attractive 8.2%, providing a nice boost to shareholder returns.
Bank of Chongqing's Payment Has Solid Earnings Coverage
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Prior to this announcement, Bank of Chongqing's earnings easily covered the dividend, but free cash flows were negative. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.
Looking forward, earnings per share is forecast to rise by 6.3% over the next year. If the dividend continues on this path, the payout ratio could be 32% by next year, which we think can be pretty sustainable going forward.
Bank of Chongqing's Dividend Has Lacked Consistency
Looking back, Bank of Chongqing's dividend hasn't been particularly consistent. This suggests that the dividend might not be the most reliable. The dividend has gone from CN¥0.22 in 2014 to the most recent annual payment of CN¥0.37. This means that it has been growing its distributions at 7.6% per annum over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Bank of Chongqing might have put its house in order since then, but we remain cautious.
We Could See Bank of Chongqing's Dividend Growing
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. Earnings per share has been crawling upwards at 2.2% per year. Earnings growth is slow, but on the plus side, the dividend payout ratio is low and dividends could grow faster than earnings, if the company decides to increase its payout ratio.
We'd also point out that Bank of Chongqing has issued stock equal to 11% of shares outstanding. 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.
Overall, we always like to see the dividend being raised, but we don't think Bank of Chongqing will make a great income stock. While Bank of Chongqing is earning enough to cover the dividend, we are generally unimpressed with its future prospects. This company is not in the top tier of income providing stocks.
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. Taking the debate a bit further, we've identified 2 warning signs for Bank of Chongqing that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.
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