Would Zhongzhi Pharmaceutical Holdings Limited (HKG:3737) Be Valuable To Income Investors?

Is Zhongzhi Pharmaceutical Holdings Limited (HKG:3737) 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 popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

In this case, Zhongzhi Pharmaceutical Holdings likely looks attractive to dividend investors, given its 5.7% dividend yield and five-year payment history. We'd agree the yield does look enticing. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

Click the interactive chart for our full dividend analysis

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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Zhongzhi Pharmaceutical Holdings paid out 39% of its profit as dividends, over the trailing twelve month period. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Zhongzhi Pharmaceutical Holdings paid out 56% of its free cash flow last year, which is acceptable, but is starting to limit the amount of earnings that can be reinvested into the business. It's positive to see that Zhongzhi Pharmaceutical Holdings' 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 Zhongzhi Pharmaceutical Holdings' strong net cash position, which will let it pay larger dividends for a time, should it choose.

We update our data on Zhongzhi Pharmaceutical 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. Looking at the data, we can see that Zhongzhi Pharmaceutical Holdings has been paying a dividend for the past five years. During the past five-year period, the first annual payment was CN¥0.03 in 2015, compared to CN¥0.08 last year. This works out to be a compound annual growth rate (CAGR) of approximately 22% a year over that time. Zhongzhi Pharmaceutical Holdings' dividend payments have fluctuated, so it hasn't grown 22% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

So, its dividends have grown at a rapid rate over this time, but payments have been cut in the past. The stock may still be worth considering as part of a diversified dividend portfolio.

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. Zhongzhi Pharmaceutical Holdings' earnings per share have been essentially flat over the past five years. Over the long term, steady earnings per share is a risk as the value of the dividends can be reduced by inflation.

Conclusion

To summarise, shareholders should always check that Zhongzhi Pharmaceutical Holdings' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Zhongzhi Pharmaceutical Holdings' dividend payout ratios are within normal bounds, although we note its cash flow is not as strong as the income statement would suggest. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. Ultimately, Zhongzhi Pharmaceutical Holdings comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 1 warning sign for Zhongzhi Pharmaceutical Holdings that investors should know about before committing capital to this stock.

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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