Uni-President China Holdings Ltd (HKG:220) Is Yielding 4.6% - But Is It A Buy?

Is Uni-President China Holdings Ltd (HKG:220) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

A high yield and a long history of paying dividends is an appealing combination for Uni-President China Holdings. It would not be a surprise to discover that many investors buy it for the dividends. Some simple research can reduce the risk of buying Uni-President China Holdings for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Uni-President China Holdings!

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, Uni-President China Holdings paid out 100% of its profit as dividends. This is quite a high payout ratio that suggests the dividend is not well covered by earnings.

With a strong net cash balance, Uni-President China Holdings investors may not have much to worry about in the near term from a dividend perspective.

We update our data on Uni-President China Holdings every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of Uni-President China Holdings' dividend payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was CN¥0.1 in 2011, compared to CN¥0.4 last year. This works out to be a compound annual growth rate (CAGR) of approximately 14% a year over that time. The dividends haven't grown at precisely 14% every year, but this is a useful way to average out the historical rate of growth.

Uni-President China Holdings has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, but it might be worth considering if the business has turned a corner.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Uni-President China Holdings has grown its earnings per share at 14% per annum over the past five years. Although earnings per share are up nicely Uni-President China Holdings is paying out 100% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.

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. First, it's not great to see how much of its earnings are being paid as dividends. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Uni-President China Holdings out there.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 1 warning sign for Uni-President China Holdings that you should be aware of before investing.

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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