Read This Before Buying China High Speed Transmission Equipment Group Co., Ltd. (HKG:658) For Its Dividend

Today we'll take a closer look at China High Speed Transmission Equipment Group Co., Ltd. (HKG:658) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. 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.

A slim 2.7% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, China High Speed Transmission Equipment Group could have potential. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Click the interactive chart for our full dividend analysis

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. 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. In the last year, China High Speed Transmission Equipment Group paid out 62% of its profit as dividends. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. China High Speed Transmission Equipment Group's cash payout ratio last year was 14%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout. It's positive to see that China High Speed Transmission Equipment Group's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

While the above analysis focuses on dividends relative to a company's earnings, we do note China High Speed Transmission Equipment 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 China High Speed Transmission Equipment Group's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. China High Speed Transmission Equipment Group has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was CN¥0.3 in 2011, compared to CN¥0.2 last year. This works out to be a decline of approximately 4.1% per year over that time. China High Speed Transmission Equipment Group's dividend hasn't shrunk linearly at 4.1% per annum, but the CAGR is a useful estimate of the historical rate of change.

A shrinking dividend over a 10-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Over the past five years, it looks as though China High Speed Transmission Equipment Group's EPS have declined at around 3.2% a year. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.

Conclusion

To summarise, shareholders should always check that China High Speed Transmission Equipment Group's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think China High Speed Transmission Equipment Group has an acceptable payout ratio and its dividend is well covered by cashflow. Earnings per share are down, and China High Speed Transmission Equipment Group's dividend has been cut at least once in the past, which is disappointing. In sum, we find it hard to get excited about China High Speed Transmission Equipment Group from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.

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. For example, we've picked out 4 warning signs for China High Speed Transmission Equipment Group that investors should know about before committing capital to this stock.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 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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