Is China 21st Century Education Group Limited (HKG:1598) An Attractive Dividend Stock?

Is China 21st Century Education Group Limited (HKG:1598) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

China 21st Century Education Group has only been paying a dividend for a year or so, so investors might be curious about its 2.3% yield. The company also returned around 4.2% of its market capitalisation to shareholders in the form of stock buybacks over the past year. There are a few simple ways to reduce the risks of buying China 21st Century Education Group for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on China 21st Century Education Group!

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, China 21st Century Education Group paid out 20% of its profit as dividends. With a low payout ratio, it looks like the dividend is comprehensively covered by earnings.

While the above analysis focuses on dividends relative to a company's earnings, we do note China 21st Century Education 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 21st Century Education Group's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. With a payment history of less than 2 years, we think it's a bit too soon to think about living on the income from its dividend. This works out to a decline of approximately 34% over that time.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

Dividend Growth Potential

Examining whether the dividend is affordable and stable is important. However, it's also important to assess if earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient's purchasing power. China 21st Century Education Group has grown its earnings per share at 6.7% per annum over the past three years. With a decent amount of growth and a low payout ratio, we think this bodes well for China 21st Century Education Group's prospects of growing its dividend payments in the future.

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. Firstly, we like that China 21st Century Education Group has a low and conservative payout ratio. Second, earnings growth has been ordinary, and its history of dividend payments is shorter than we'd like. In summary, we're unenthused by China 21st Century Education Group as a dividend stock. It's not that we think it is a bad company; it simply falls short of our criteria in some key areas.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 1 warning sign for China 21st Century Education Group that investors need to be conscious of moving forward.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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