China Harmony Auto Holding (HKG:3836) Is Paying Out Less In Dividends Than Last Year

China Harmony Auto Holding Limited (HKG:3836) has announced that on 11th of August, it will be paying a dividend ofCN¥0.066, which a reduction from last year's comparable dividend. However, the dividend yield of 7.1% is still a decent boost to shareholder returns.

Check out our latest analysis for China Harmony Auto Holding

China Harmony Auto Holding's Dividend Is Well Covered By Earnings

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Even though China Harmony Auto Holding isn't generating a profit, it is generating healthy free cash flows that easily cover the dividend. In general, cash flows are more important than the more traditional measures of profit so we feel pretty comfortable with the dividend at this level.

According to analysts, EPS should be several times higher next year. Assuming the dividend continues along recent trends, we think the payout ratio will be 0.8%, which makes us pretty comfortable with the sustainability of the dividend.

China Harmony Auto Holding's Dividend Has Lacked Consistency

It's comforting to see that China Harmony Auto Holding has been paying a dividend for a number of years now, however it has been cut at least once in that time. This suggests that the dividend might not be the most reliable. The annual payment during the last 9 years was CN¥0.063 in 2014, and the most recent fiscal year payment was CN¥0.0581. Dividend payments have shrunk at a rate of less than 1% per annum over this time frame. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.

The Dividend Has Limited Growth Potential

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. Over the past five years, it looks as though China Harmony Auto Holding's EPS has declined at around 49% a year. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this becomes a long term trend.

The Dividend Could Prove To Be Unreliable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would probably look elsewhere for an income investment.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 1 warning sign for China Harmony Auto Holding that investors need to be conscious of moving forward. Is China Harmony Auto Holding not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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