What To Know Before Buying Shanghai Fudan-Zhangjiang Bio-Pharmaceutical Co., Ltd. (HKG:1349) For Its Dividend

Today we'll take a closer look at Shanghai Fudan-Zhangjiang Bio-Pharmaceutical Co., Ltd. (HKG:1349) 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. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

Investors might not know much about Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's dividend prospects, even though it has been paying dividends for the last six years and offers a 1.9% yield. A low yield is generally a turn-off, but if the prospects for earnings growth were strong, investors might be pleasantly surprised by the long-term results. There are a few simple ways to reduce the risks of buying Shanghai Fudan-Zhangjiang Bio-Pharmaceutical for its dividend, and we'll go through these below.

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Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, 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, Shanghai Fudan-Zhangjiang Bio-Pharmaceutical paid out 41% of its profit as dividends. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. With a cash payout ratio of 99%, Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's dividend payments are poorly covered by cash flow. Shanghai Fudan-Zhangjiang Bio-Pharmaceutical paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough free cash flow to cover the dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's ability to maintain its dividend.

With a strong net cash balance, Shanghai Fudan-Zhangjiang Bio-Pharmaceutical investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's financial position here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the data, we can see that Shanghai Fudan-Zhangjiang Bio-Pharmaceutical has been paying a dividend for the past six years. It's good to see that Shanghai Fudan-Zhangjiang Bio-Pharmaceutical has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past six-year period, the first annual payment was CN¥0.05 in 2015, compared to CN¥0.07 last year. This works out to be a compound annual growth rate (CAGR) of approximately 5.8% a year over that time. Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's dividend payments have fluctuated, so it hasn't grown 5.8% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.

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? Shanghai Fudan-Zhangjiang Bio-Pharmaceutical has grown its earnings per share at 4.2% per annum over the past five years. Shanghai Fudan-Zhangjiang Bio-Pharmaceutical is paying out less than half of its earnings, which we like. However, earnings per share are unfortunately not growing much. Might this suggest that the company should pay a higher dividend instead?

We'd also point out that Shanghai Fudan-Zhangjiang Bio-Pharmaceutical issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. First, we like Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's low dividend payout ratio, although we're a bit concerned that it paid out a substantially higher percentage of its free cash flow. Second, earnings growth has been ordinary, and its history of dividend payments is chequered - having cut its dividend at least once in the past. In sum, we find it hard to get excited about Shanghai Fudan-Zhangjiang Bio-Pharmaceutical 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.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic 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 Shanghai Fudan-Zhangjiang Bio-Pharmaceutical that investors should know about before committing capital to this stock.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 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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