Zhongzhi Pharmaceutical Holdings (HKG:3737) Is Reducing Its Dividend To CN¥0.03

Zhongzhi Pharmaceutical Holdings Limited (HKG:3737) has announced that on 13th of June, it will be paying a dividend ofCN¥0.03, which a reduction from last year's comparable dividend. The yield is still above the industry average at 5.0%.

Check out our latest analysis for Zhongzhi Pharmaceutical Holdings

Zhongzhi Pharmaceutical Holdings' Payment Has Solid Earnings Coverage

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Based on the last payment, Zhongzhi Pharmaceutical Holdings' earnings were much higher than the dividend, but it wasn't converting those earnings into cash flow. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.

Over the next year, EPS could expand by 13.0% if recent trends continue. If the dividend continues along recent trends, we estimate the payout ratio will be 49%, which is in the range that makes us comfortable with the sustainability of the dividend.

Zhongzhi Pharmaceutical Holdings' Dividend Has Lacked Consistency

Looking back, Zhongzhi Pharmaceutical Holdings' dividend hasn't been particularly consistent. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. Since 2016, the annual payment back then was CN¥0.0294, compared to the most recent full-year payment of CN¥0.0554. This implies that the company grew its distributions at a yearly rate of about 8.2% over that duration. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Zhongzhi Pharmaceutical Holdings might have put its house in order since then, but we remain cautious.

The Dividend Looks Likely To Grow

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. Zhongzhi Pharmaceutical Holdings has impressed us by growing EPS at 13% per year over the past five years. The lack of cash flows does make us a bit cautious though, especially when it comes to the future of the dividend.

In Summary

Overall, it's not great to see that the dividend has been cut, but this might be explained by the payments being a bit high previously. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We would be a touch cautious of relying on this stock primarily for the dividend income.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, Zhongzhi Pharmaceutical Holdings has 2 warning signs (and 1 which can't be ignored) we think you should know about. Is Zhongzhi Pharmaceutical Holdings not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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