Should You Buy China YuHua Education Corporation Limited (HKG:6169) For Its Dividend?

Is China YuHua Education Corporation Limited (HKG:6169) 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 the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

Investors might not know much about China YuHua Education's dividend prospects, even though it has been paying dividends for the last four years and offers a 2.4% yield. A 2.4% yield is not inspiring, but the longer payment history has some appeal. Some simple research can reduce the risk of buying China YuHua Education for its dividend - read on to learn more.

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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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, China YuHua Education paid out 250% of its profit as dividends. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. China YuHua Education paid out 72% of its cash flow as dividends last year, which is within a reasonable range for the average corporation. It's good to see that while China YuHua Education's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Consider getting our latest analysis on China YuHua Education's financial position here.

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. China YuHua Education has been paying a dividend for the past four years. The company has been paying a stable dividend for a few years now, but we'd like to see more evidence of consistency over a longer period. During the past four-year period, the first annual payment was CN¥0.07 in 2017, compared to CN¥0.1 last year. Dividends per share have grown at approximately 22% per year over this time.

China YuHua Education has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Over the past three years, it looks as though China YuHua Education's EPS have declined at around 20% a year. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

Conclusion

To summarise, shareholders should always check that China YuHua Education's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're not keen on the fact that China YuHua Education paid out such a high percentage of its income, although its cashflow is in better shape. Earnings per share are down, and to our mind China YuHua Education has not been paying a dividend long enough to demonstrate its resilience across economic cycles. There are a few too many issues for us to get comfortable with China YuHua Education from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 4 warning signs for China YuHua Education that investors need to be conscious of moving forward.

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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