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 means the annual payment is 7.0% of the current stock price, which is above the average for the industry.
Dawnrays Pharmaceutical (Holdings)'s Dividend Is Well Covered By Earnings
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. However, prior to this announcement, Dawnrays Pharmaceutical (Holdings) was quite comfortably covering its dividend with earnings and it was paying more than 75% of its free cash flow to shareholders. The business is returning a large chunk of its cash to shareholders, which means it is not being used to grow the business.
Over the next year, EPS could expand by 2.9% if recent trends continue. 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 dividend has gone from CN¥0.04 to CN¥0.054. This works out to be a compound annual growth rate (CAGR) of approximately 3.0% a year over that time. The dividend has seen some fluctuations in the past, so even though the dividend was raised this year, we should remember that it has been cut in the past.
The Dividend's Growth Prospects Are Limited
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Earnings has been rising at 2.9% per annum over the last five years, which admittedly is a bit slow. While growth may be thin on the ground, Dawnrays Pharmaceutical (Holdings) could always pay out a higher proportion of earnings to increase shareholder returns.
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 company hasn't been paying a very consistent dividend over time, despite only paying out a small portion of earnings. We would be a touch cautious of relying on this stock primarily for the dividend income.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Case in point: We've spotted 2 warning signs for Dawnrays Pharmaceutical (Holdings) (of which 1 can't be ignored!) you should know about. 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.