Does LUZHENG FUTURES Company Limited (HKG:1461) Have A Place In Your Dividend Portfolio?

Today we'll take a closer look at LUZHENG FUTURES Company Limited (HKG:1461) 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. 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.

In this case, LUZHENG FUTURES likely looks attractive to dividend investors, given its 4.4% dividend yield and five-year payment history. It sure looks interesting on these metrics - but there's always more to the story. There are a few simple ways to reduce the risks of buying LUZHENG FUTURES for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on LUZHENG FUTURES!

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. 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, LUZHENG FUTURES paid out 42% of its profit as dividends. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

We update our data on LUZHENG FUTURES every 24 hours, so you can always get our latest analysis of its financial health, here.

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. LUZHENG FUTURES has been paying a dividend for the past five years. During the past five-year period, the first annual payment was CN¥0.04 in 2016, compared to CN¥0.02 last year. The dividend has fallen 45% over that period.

We struggle to make a case for buying LUZHENG FUTURES for its dividend, given that payments have shrunk over the past five 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. LUZHENG FUTURES' EPS have fallen by approximately 12% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and LUZHENG FUTURES' earnings per share, which support the dividend, have been anything but stable.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Firstly, we like that LUZHENG FUTURES has a low and conservative payout ratio. Earnings per share are down, and LUZHENG FUTURES' dividend has been cut at least once in the past, which is disappointing. In summary, we're unenthused by LUZHENG FUTURES 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.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've identified 3 warning signs for LUZHENG FUTURES (1 is a bit unpleasant!) that you should be aware of before investing.

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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