Is Shenguan Holdings (Group) Limited's (HKG:829) 7.0% Dividend Worth Your Time?

Is Shenguan Holdings (Group) Limited (HKG:829) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

With Shenguan Holdings (Group) yielding 7.0% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. We'd guess that plenty of investors have purchased it for the income. Some simple research can reduce the risk of buying Shenguan Holdings (Group) for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Shenguan Holdings (Group)!

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, Shenguan Holdings (Group) paid out 81% of its profit as dividends. It's paying out most of its earnings, which limits the amount that can be reinvested in the business. This may indicate limited need for further capital within the business, or highlight a commitment to paying a dividend.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Shenguan Holdings (Group)'s cash payout ratio last year was 17%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It's positive to see that Shenguan Holdings (Group)'s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

While the above analysis focuses on dividends relative to a company's earnings, we do note Shenguan Holdings (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 Shenguan Holdings (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. For the purpose of this article, we only scrutinise the last decade of Shenguan Holdings (Group)'s 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¥0.02 in 2010, compared to CN¥0.02 last year. This works out to be a decline of approximately 1.7% per year over that time. Shenguan Holdings (Group)'s dividend hasn't shrunk linearly at 1.7% per annum, but the CAGR is a useful estimate of the historical rate of change.

A shrinking dividend over a 10-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Over the past five years, it looks as though Shenguan Holdings (Group)'s EPS have declined at around 33% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Shenguan Holdings (Group)'s 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. First, we think Shenguan Holdings (Group) has an acceptable payout ratio and its dividend is well covered by cashflow. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In sum, we find it hard to get excited about Shenguan Holdings (Group) from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 2 warning signs for Shenguan Holdings (Group) (of which 1 doesn't sit too well with us!) you should know about.

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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