Is Zhong Ao Home Group Limited (HKG:1538) A Smart Choice For Dividend Investors?

Is Zhong Ao Home Group Limited (HKG:1538) 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.

In this case, Zhong Ao Home Group likely looks attractive to dividend investors, given its 3.2% dividend yield and five-year payment history. We'd agree the yield does look enticing. Remember though, given the recent drop in its share price, Zhong Ao Home Group's yield will look higher, even though the market may now be expecting a decline in its long-term prospects. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

Explore this interactive chart for our latest analysis on Zhong Ao Home Group!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, Zhong Ao Home Group paid out 17% of its profit as dividends. We like this low payout ratio, because it implies the dividend is well covered and leaves ample opportunity for reinvestment.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Zhong Ao Home Group's cash payout ratio last year was 13%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It's positive to see that Zhong Ao Home Group'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.

With a strong net cash balance, Zhong Ao Home Group investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on Zhong Ao Home Group's financial position here.

Dividend Volatility

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. Zhong Ao Home Group has been paying a dividend for the past five years. During the past five-year period, the first annual payment was CN¥0.02 in 2015, compared to CN¥0.02 last year. This works out to be a compound annual growth rate (CAGR) of approximately 2.1% a year over that time. The dividends haven't grown at precisely 2.1% every year, but this is a useful way to average out the historical rate of growth.

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 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? Zhong Ao Home Group has grown its earnings per share at 3.4% per annum over the past five years. As we saw above, earnings per share growth has not been strong. However, at least the payout ratio is conservative, and there is plenty of potential to increase this over time.

We'd also point out that Zhong Ao Home Group issued a meaningful number of new shares in the past year. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

Conclusion

To summarise, shareholders should always check that Zhong Ao Home Group's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that Zhong Ao Home Group has low and conservative payout ratios. Unfortunately, earnings growth has also been mediocre, and the company has cut its dividend at least once in the past. Overall we think Zhong Ao Home Group is an interesting dividend stock, although it could be better.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 4 warning signs for Zhong Ao Home Group that investors should know about before committing capital to this stock.

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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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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