Key Things To Watch Out For If You Are After China Reinsurance (Group) Corporation's (HKG:1508) 6.0% Dividend

Today we'll take a closer look at China Reinsurance (Group) Corporation (HKG:1508) 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. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

In this case, China Reinsurance (Group) likely looks attractive to dividend investors, given its 6.0% dividend yield and five-year payment history. It sure looks interesting on these metrics - but there's always more to the story. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Explore this interactive chart for our latest analysis on China Reinsurance (Group)!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. China Reinsurance (Group) paid out 30% of its profit as dividends, over the trailing twelve month period. 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.

Consider getting our latest analysis on China Reinsurance (Group)'s financial position here.

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. China Reinsurance (Group) has been paying a dividend for the past five years. During the past five-year period, the first annual payment was CN¥0.05 in 2016, compared to CN¥0.04 last year. The dividend has shrunk at around 2.3% a year during that period. China Reinsurance (Group)'s dividend has been cut sharply at least once, so it hasn't fallen by 2.3% every year, but this is a decent approximation of the long term change.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

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. It's not great to see that China Reinsurance (Group)'s have fallen at approximately 7.8% over the past five years. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company's dividend.

Conclusion

To summarise, shareholders should always check that China Reinsurance (Group)'s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that China Reinsurance (Group) has a low and conservative payout ratio. Earnings per share are down, and China Reinsurance (Group)'s dividend has been cut at least once in the past, which is disappointing. In summary, we're unenthused by China Reinsurance (Group) 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.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we've picked out 2 warning signs for China Reinsurance (Group) that investors should take into consideration.

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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