Is Beijing Tong Ren Tang Chinese Medicine Company Limited (HKG:3613) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
With a 1.9% yield and a six-year payment history, investors probably think Beijing Tong Ren Tang Chinese Medicine looks like a reliable dividend stock. A 1.9% yield is not inspiring, but the longer payment history has some appeal. Some simple research can reduce the risk of buying Beijing Tong Ren Tang Chinese Medicine for its dividend – read on to learn more.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, 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, Beijing Tong Ren Tang Chinese Medicine paid out 30% of its profit as dividends. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. Plus, there is room to increase the payout ratio over time.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Beijing Tong Ren Tang Chinese Medicine paid out a conservative 34% of its free cash flow as dividends last year. It’s positive to see that Beijing Tong Ren Tang Chinese Medicine’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
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. Beijing Tong Ren Tang Chinese Medicine has been paying a dividend for the past six years. It’s good to see that Beijing Tong Ren Tang Chinese Medicine 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 HK$0.17 in 2013, compared to HK$0.23 last year. Dividends per share have grown at approximately 5.4% per year over this time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.
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? It’s good to see Beijing Tong Ren Tang Chinese Medicine has been growing its earnings per share at 21% a year over the past 5 years. With high earnings per share growth in recent times and a modest payout ratio, we think this is an attractive combination if earnings can be reinvested to generate further growth.
To summarise, shareholders should always check that Beijing Tong Ren Tang Chinese Medicine’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we like that the company’s dividend payments appear well covered, although the retained capital also needs to be effectively reinvested. Unfortunately, the company has not been able to generate earnings per share growth, and cut its dividend at least once in the past. Beijing Tong Ren Tang Chinese Medicine performs highly under this analysis, although it falls slightly short of our exacting standards. At the right valuation, it could be a solid dividend prospect.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 4 Beijing Tong Ren Tang Chinese Medicine analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
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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