China BlueChemical (HKG:3983) Is Paying Out A Larger Dividend Than Last Year

China BlueChemical Ltd. (HKG:3983) has announced that it will be increasing its periodic dividend on the 30th of June to CN¥0.1988, which will be 9.5% higher than last year's comparable payment amount of CN¥0.182. This makes the dividend yield 9.9%, which is above the industry average.

See our latest analysis for China BlueChemical

China BlueChemical's Dividend Is Well Covered By Earnings

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, China BlueChemical's dividend was only 50% of earnings, however it was paying out 103% of free cash flows. This signals that the company is more focused on returning cash flow to shareholders, but it could mean that the dividend is exposed to cuts in the future.

The next year is set to see EPS grow by 1.1%. Assuming the dividend continues along recent trends, we think the payout ratio could be 55% by next year, which is in a pretty sustainable range.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from an annual total of CN¥0.15 in 2013 to the most recent total annual payment of CN¥0.178. This works out to be a compound annual growth rate (CAGR) of approximately 1.7% a year over that time. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. It's encouraging to see that China BlueChemical has been growing its earnings per share at 101% a year over the past five years. China BlueChemical is clearly able to grow rapidly while still returning cash to shareholders, positioning it to become a strong dividend payer in the future.

Our Thoughts On China BlueChemical's Dividend

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While China BlueChemical is earning enough to cover the payments, the cash flows are lacking. We don't think China BlueChemical is a great stock to add to your portfolio if income is your focus.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. 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 China BlueChemical that you should be aware of before investing. Is China BlueChemical not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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