Is Sinopec Shanghai Petrochemical Company Limited (HKG:338) At Risk Of Cutting Its Dividend?

Could Sinopec Shanghai Petrochemical Company Limited (HKG:338) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

In this case, Sinopec Shanghai Petrochemical likely looks attractive to investors, given its 8.4% 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. Some simple research can reduce the risk of buying Sinopec Shanghai Petrochemical for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Sinopec Shanghai Petrochemical!

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. Although Sinopec Shanghai Petrochemical pays a dividend, it was loss-making during the past year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Sinopec Shanghai Petrochemical paid out 73% 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.

With a strong net cash balance, Sinopec Shanghai Petrochemical investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on Sinopec Shanghai Petrochemical's financial position 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. Sinopec Shanghai Petrochemical has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was CN¥0.02 in 2011, compared to CN¥0.1 last year. Dividends per share have grown at approximately 20% per year over this time. The dividends haven't grown at precisely 20% every year, but this is a useful way to average out the historical rate of growth.

It's not great to see that the payment has been cut in the past. We're generally more wary of companies that have cut their dividend before, as they tend to perform worse in an economic downturn.

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. Over the past five years, it looks as though Sinopec Shanghai Petrochemical's EPS have declined at around 18% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Sinopec Shanghai Petrochemical's earnings per share, which support the dividend, have been anything but stable.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We're a bit uncomfortable with the company paying a dividend while being loss-making, although at least the dividend was covered by free cash flow. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. Using these criteria, Sinopec Shanghai Petrochemical looks quite suboptimal from a dividend investment perspective.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 1 warning sign for Sinopec Shanghai Petrochemical that investors should know about before committing capital to this stock.

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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