The board of Henan Jinma Energy Company Limited (HKG:6885) has announced that it will pay a dividend on the 30th of November, with investors receiving HK$0.12 per share. Based on this payment, the dividend yield on the company's stock will be 8.2%, which is an attractive boost to shareholder returns.
Henan Jinma Energy's Earnings Easily Cover the Distributions
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Based on the last payment, Henan Jinma Energy was earning enough to cover the dividend, but free cash flows weren't positive. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.
Over the next year, EPS could expand by 75.5% if recent trends continue. Assuming the dividend continues along recent trends, we think the payout ratio could be 19% by next year, which is in a pretty sustainable range.
Henan Jinma Energy's Dividend Has Lacked Consistency
The track record isn't the longest, but we are already seeing a bit of instability in the payments. Since 2018, the first annual payment was CN¥0.20, compared to the most recent full-year payment of CN¥0.30. This means that it has been growing its distributions at 14% per annum over that time. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.
The Dividend Looks Likely To Grow
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. Henan Jinma Energy has seen EPS rising for the last five years, at 76% per annum. Rapid earnings growth and a low payout ratio suggest this company has been effectively reinvesting in its business. Should that continue, this company could have a bright future.
Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. We don't think Henan Jinma Energy is a great stock to add to your portfolio if income is your focus.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 2 warning signs for Henan Jinma Energy (of which 1 is significant!) you should know about. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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