The board of Dawnrays Pharmaceutical (Holdings) Limited (HKG:2348) has announced that it will pay a dividend of HK$0.015 per share on the 5th of October. This makes the dividend yield 7.1%, which will augment investor returns quite nicely.
Dawnrays Pharmaceutical (Holdings)'s Earnings Easily Cover the Distributions
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. But before making this announcement, Dawnrays Pharmaceutical (Holdings)'s earnings quite easily covered the dividend. The business is returning a large chunk of its cash to shareholders, which means it is not being used to grow the business.
If the trend of the last few years continues, EPS will grow by 2.9% over the next 12 months. If the dividend continues along recent trends, we estimate the payout ratio will be 56%, which is in the range that makes us comfortable with the sustainability of the dividend.
The company's dividend history has been marked by instability, with at least 1 cut in the last 10 years. Since 2011, the first annual payment was CN¥0.04, compared to the most recent full-year payment of CN¥0.054. This works out to be a compound annual growth rate (CAGR) of approximately 3.0% a year over that time. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.
Dividend Growth May Be Hard To Achieve
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. Earnings per share has been crawling upwards at 2.9% per year. While EPS growth is quite low, Dawnrays Pharmaceutical (Holdings) has the option to increase the payout ratio to return more cash to shareholders.
Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. The low payout ratio is a redeeming feature, but generally we are not too happy with the payments Dawnrays Pharmaceutical (Holdings) has been making. We would probably look elsewhere for an income investment.
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. Just as an example, we've come across 2 warning signs for Dawnrays Pharmaceutical (Holdings) you should be aware of, and 1 of them shouldn't be ignored. We have also put together a list of global stocks with a solid dividend.
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Dawnrays Pharmaceutical (Holdings)
Dawnrays Pharmaceutical (Holdings) Limited, an investment holding company, develops, manufactures, and sells non-patented pharmaceutical medicines in Mainland China and internationally.
Excellent balance sheet with solid track record.