Is GDH Guangnan (Holdings) Limited's (HKG:1203) 6.1% Dividend Worth Your Time?

Today we'll take a closer look at GDH Guangnan (Holdings) Limited (HKG:1203) 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, GDH Guangnan (Holdings) likely looks attractive to investors, given its 6.1% dividend yield and a payment history of over ten years. It would not be a surprise to discover that many investors buy it for the dividends. There are a few simple ways to reduce the risks of buying GDH Guangnan (Holdings) for its dividend, and we'll go through these below.

Click the interactive chart for our full dividend analysis

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. 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, GDH Guangnan (Holdings) paid out 53% of its profit as dividends. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. GDH Guangnan (Holdings)'s cash payout ratio last year was 5.6%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It's positive to see that GDH Guangnan (Holdings)'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.

With a strong net cash balance, GDH Guangnan (Holdings) investors may not have much to worry about in the near term from a dividend perspective.

Remember, you can always get a snapshot of GDH Guangnan (Holdings)'s latest financial position, by checking our visualisation of its financial health.

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 GDH Guangnan (Holdings)'s dividend payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was HK$0.04 in 2010, compared to HK$0.04 last year. This works out to be a decline of approximately 1.2% per year over that time. GDH Guangnan (Holdings)'s dividend has been cut sharply at least once, so it hasn't fallen by 1.2% 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 see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? GDH Guangnan (Holdings)'s earnings per share have shrunk at 14% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and GDH Guangnan (Holdings)'s earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that GDH Guangnan (Holdings)'s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think GDH Guangnan (Holdings) has an acceptable payout ratio and its dividend is well covered by cashflow. Earnings per share are down, and GDH Guangnan (Holdings)'s dividend has been cut at least once in the past, which is disappointing. In sum, we find it hard to get excited about GDH Guangnan (Holdings) 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.

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. Just as an example, we've come accross 3 warning signs for GDH Guangnan (Holdings) you should be aware of, and 1 of them doesn't sit too well with us.

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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