Guotai Junan International Holdings' (HKG:1788) Dividend Will Be Reduced To HK$0.01

Guotai Junan International Holdings Limited's (HKG:1788) dividend is being reduced to HK$0.01 on the 24th of June. However, the dividend yield of 7.0% is still a decent boost to shareholder returns.

View our latest analysis for Guotai Junan International Holdings

Guotai Junan International Holdings' Dividend Is Well Covered By Earnings

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Guotai Junan International Holdings' dividend was comfortably covered by both cash flow and earnings. This means that a large portion of its earnings are being retained to grow the business.

Looking forward, earnings per share is forecast to rise by 14.1% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 46%, which is in the range that makes us comfortable with the sustainability of the dividend.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. The first annual payment during the last 10 years was HK$0.027 in 2012, and the most recent fiscal year payment was HK$0.06. This implies that the company grew its distributions at a yearly rate of about 8.4% over that duration. We like to see dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.

Dividend Growth May Be Hard To Achieve

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. In the last five years, Guotai Junan International Holdings' earnings per share has shrunk at approximately 4.2% per annum. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends. Earnings are predicted to grow over the next year, but we would remain cautious until a track record of earnings growth is established.

Our Thoughts On Guotai Junan International Holdings' Dividend

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would be a touch cautious of relying on this stock primarily for the dividend income.

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. Taking the debate a bit further, we've identified 2 warning signs for Guotai Junan International Holdings that investors need to be conscious of moving forward. Is Guotai Junan International Holdings not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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