Is Beijing Tong Ren Tang Chinese Medicine Company Limited (HKG:3613) a good dividend stock? How would you know? 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.
Investors might not know much about Beijing Tong Ren Tang Chinese Medicine’s dividend prospects, even though it has been paying dividends for the last six years and offers a 1.6% yield. A 1.6% 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.
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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, Beijing Tong Ren Tang Chinese Medicine paid out 33% of its profit as dividends. This is medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Plus, there is room to increase the payout ratio over time.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. Beijing Tong Ren Tang Chinese Medicine’s cash payout ratio in the last year was 30%, which suggests dividends were well covered by cash generated by the business.
While the above analysis focuses on dividends relative to a company’s earnings, we do note Beijing Tong Ren Tang Chinese Medicine’s strong net cash position, which will let it pay larger dividends for a time, should it choose.
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 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
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It’s good to see Beijing Tong Ren Tang Chinese Medicine has been growing its earnings per share at 19% a year over the past 5 years. Earnings per share have been growing at a good rate, and the company is paying less than half its earnings as dividends. We generally think this is an attractive combination, as it permits further reinvestment in the business.
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. It’s great to see that Beijing Tong Ren Tang Chinese Medicine is paying out a low percentage of its earnings and cash flow. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. All things considered, Beijing Tong Ren Tang Chinese Medicine looks like a strong prospect. At the right valuation, it could be something special.
Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 3 analysts we track are forecasting for Beijing Tong Ren Tang Chinese Medicine for free with public analyst estimates for the company.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.