Dongguang Chemical's (HKG:1702) Dividend Will Be Reduced To CN¥0.036

Dongguang Chemical Limited (HKG:1702) is reducing its dividend from last year's comparable payment to CN¥0.036 on the 6th of June. Based on this payment, the dividend yield will be 2.1%, which is lower than the average for the industry.

Our free stock report includes 1 warning sign investors should be aware of before investing in Dongguang Chemical. Read for free now.

Dongguang Chemical's Projected Earnings Seem Likely To Cover Future Distributions

It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. Prior to this announcement, Dongguang Chemical's dividend was only 25% of earnings, however it was paying out 236% of free cash flows. The business might be trying to strike a balance between returning cash to shareholders and reinvesting back into the business, but this high of a payout ratio could definitely force the dividend to be cut if the company runs into a bit of a tough spot.

Unless the company can turn things around, EPS could fall by 12.1% over the next year. If the dividend continues along recent trends, we estimate the payout ratio could be 35%, which we consider to be quite comfortable, with most of the company's earnings left over to grow the business in the future.

View our latest analysis for Dongguang Chemical

Dongguang Chemical's Dividend Has Lacked Consistency

Dongguang Chemical has been paying dividends for a while, but the track record isn't stellar. This suggests that the dividend might not be the most reliable. Since 2018, the dividend has gone from CN¥0.0163 total annually to CN¥0.0331. This means that it has been growing its distributions at 11% per annum over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

The Dividend Has Limited Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Over the past five years, it looks as though Dongguang Chemical's EPS has declined at around 12% a year. Such rapid declines definitely have the potential to constrain dividend payments if the trend continues into the future.

The Dividend Could Prove To Be Unreliable

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. Overall, we don't think this company has the makings of a good income stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 1 warning sign for Dongguang Chemical that investors should know about before committing capital to this stock. Is Dongguang Chemical not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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