Key Things To Watch Out For If You Are After YiChang HEC ChangJiang Pharmaceutical Co., Ltd.'s (HKG:1558) 5.1% Dividend

Could YiChang HEC ChangJiang Pharmaceutical Co., Ltd. (HKG:1558) 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, YiChang HEC ChangJiang Pharmaceutical likely looks attractive to dividend investors, given its 5.1% dividend yield and five-year payment history. It sure looks interesting on these metrics - but there's always more to the story. The company also returned around 4.0% of its market capitalisation to shareholders in the form of stock buybacks over the past year. Some simple analysis can reduce the risk of holding YiChang HEC ChangJiang Pharmaceutical for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on YiChang HEC ChangJiang Pharmaceutical!

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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, YiChang HEC ChangJiang Pharmaceutical paid out 11% of its profit as dividends. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. With a cash payout ratio of 99%, YiChang HEC ChangJiang Pharmaceutical's dividend payments are poorly covered by cash flow. YiChang HEC ChangJiang 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 YiChang HEC ChangJiang Pharmaceutical's ability to maintain its dividend.

With a strong net cash balance, YiChang HEC ChangJiang Pharmaceutical investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on YiChang HEC ChangJiang Pharmaceutical's financial position here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Looking at the data, we can see that YiChang HEC ChangJiang Pharmaceutical has been paying a dividend for the past five years. During the past five-year period, the first annual payment was CN¥0.07 in 2015, compared to CN¥0.4 last year. This works out to be a compound annual growth rate (CAGR) of approximately 40% a year over that time. The dividends haven't grown at precisely 40% every year, but this is a useful way to average out the historical rate of growth.

YiChang HEC ChangJiang Pharmaceutical has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, but it might be worth considering if the business has turned a corner.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. It's good to see YiChang HEC ChangJiang Pharmaceutical has been growing its earnings per share at 51% a year over the past five years. Earnings per share have grown rapidly, and the company is retaining a majority of its earnings. We think this is ideal from an investment perspective, if the company is able to reinvest these earnings effectively.

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. First, we like YiChang HEC ChangJiang 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. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. Ultimately, YiChang HEC ChangJiang Pharmaceutical comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.

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. To that end, YiChang HEC ChangJiang Pharmaceutical has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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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