Stock Analysis

Should You Or Shouldn't You: A Dividend Analysis on PICC Property and Casualty Company Limited (HKG:2328)

SEHK:2328
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Dividend paying stocks like PICC Property and Casualty Company Limited (HKG:2328) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. 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, PICC Property and Casualty likely looks attractive to dividend investors, given its 9.5% dividend yield and nine-year payment history. We'd agree the yield does look enticing. Some simple analysis can reduce the risk of holding PICC Property and Casualty for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on PICC Property and Casualty!

historic-dividend
SEHK:2328 Historic Dividend December 28th 2020

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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. In the last year, PICC Property and Casualty paid out 50% of its profit as dividends. 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.

We update our data on PICC Property and Casualty every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Looking at the last decade of data, we can see that PICC Property and Casualty paid its first dividend at least nine years ago. It's good to see that PICC Property and Casualty has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past nine-year period, the first annual payment was CN¥0.1 in 2011, compared to CN¥0.5 last year. Dividends per share have grown at approximately 13% per year over this time. The dividends haven't grown at precisely 13% every year, but this is a useful way to average out the historical rate of growth.

PICC Property and Casualty 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. PICC Property and Casualty's 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 PICC Property and Casualty'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 PICC Property and Casualty has a low and conservative payout ratio. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. PICC Property and Casualty might not be a bad business, but it doesn't show all of the characteristics we look for in a dividend stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 1 warning sign for PICC Property and Casualty that you should be aware of before investing.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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