Is Zhengzhou Coal Mining Machinery Group Company Limited (HKG:564) An Attractive Dividend Stock?

Dividend paying stocks like Zhengzhou Coal Mining Machinery Group Company Limited (HKG:564) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

Investors might not know much about Zhengzhou Coal Mining Machinery Group's dividend prospects, even though it has been paying dividends for the last eight years and offers a 1.8% yield. A 1.8% yield is not inspiring, but the longer payment history has some appeal. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Click the interactive chart for our full dividend analysis

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Looking at the data, we can see that 26% of Zhengzhou Coal Mining Machinery Group's profits were paid out as dividends in the last 12 months. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.

While the above analysis focuses on dividends relative to a company's earnings, we do note Zhengzhou Coal Mining Machinery Group's strong net cash position, which will let it pay larger dividends for a time, should it choose.

Remember, you can always get a snapshot of Zhengzhou Coal Mining Machinery Group's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. The first recorded dividend for Zhengzhou Coal Mining Machinery Group, in the last decade, was eight years ago. It's good to see that Zhengzhou Coal Mining Machinery Group has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past eight-year period, the first annual payment was CN¥0.3 in 2013, compared to CN¥0.2 last year. This works out to be a decline of approximately 5.9% per year over that time. Zhengzhou Coal Mining Machinery Group's dividend has been cut sharply at least once, so it hasn't fallen by 5.9% every year, but this is a decent approximation of the long term change.

We struggle to make a case for buying Zhengzhou Coal Mining Machinery Group for its dividend, given that payments have shrunk over the past eight years.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. It's good to see Zhengzhou Coal Mining Machinery Group has been growing its earnings per share at 88% a year over the past five years. With high earnings per share growth in recent times and a modest payout ratio, we think this is an attractive combination if earnings can be reinvested to generate further growth.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We're glad to see Zhengzhou Coal Mining Machinery Group has a low payout ratio, as this suggests earnings are being reinvested in the business. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. Zhengzhou Coal Mining Machinery Group fits all of our criteria, and we think it's an attractive dividend idea that would warrant further investigation.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 2 warning signs for Zhengzhou Coal Mining Machinery Group that investors should take into consideration.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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This article by Simply Wall St is general in nature. 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.
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