The board of CITIC Limited (HKG:267) has announced that it will be increasing its dividend on the 8th of August to HK$0.46. This will take the annual payment from 7.6% to 7.6% of the stock price, which is above what most companies in the industry pay.
CITIC's Payment Has Solid Earnings Coverage
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. CITIC is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. 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 6.1% over the next year. If the dividend continues on this path, the payout ratio could be 26% by next year, which we think can be pretty sustainable going forward.
The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2012, the first annual payment was HK$0.45, compared to the most recent full-year payment of HK$0.61. This works out to be a compound annual growth rate (CAGR) of approximately 3.0% a year over that time. The dividend has seen some fluctuations in the past, so even though the dividend was raised this year, we should remember that it has been cut in the past.
The Dividend Looks Likely To Grow
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. We are encouraged to see that CITIC has grown earnings per share at 16% per year over the past five years. Growth in EPS bodes well for the dividend, as does the low payout ratio that the company is currently reporting.
In summary, while it's always good to see the dividend being raised, we don't think CITIC's payments are rock solid. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. 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. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come across 2 warning signs for CITIC you should be aware of, and 1 of them is a bit concerning. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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