China Harmony Auto Holding's (HKG:3836) Dividend Will Be Increased To HK$0.21

China Harmony Auto Holding Limited (HKG:3836) has announced that it will be increasing its dividend on the 16th of August to HK$0.21. This will take the dividend yield from 5.6% to 6.0%, providing a nice boost to shareholder returns.

Check out our latest analysis for China Harmony Auto Holding

China Harmony Auto Holding's Earnings Easily Cover the Distributions

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before making this announcement, China Harmony Auto Holding was paying a whopping 1,422% as a dividend, but this only made up 39% of its overall earnings. While the business may be attempting to set a balanced dividend policy, a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.

Over the next year, EPS is forecast to expand by 13.6%. If the dividend continues on this path, the payout ratio could be 42% by next year, which we think can be pretty sustainable going forward.

China Harmony Auto Holding's Dividend Has Lacked Consistency

Even in its relatively short history, the company has reduced the dividend at least once. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2014, the dividend has gone from CN¥0.063 to CN¥0.17. This works out to be a compound annual growth rate (CAGR) of approximately 13% a year over that time. China Harmony Auto Holding has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. China Harmony Auto Holding has impressed us by growing EPS at 14% per year over the past five years. China Harmony Auto Holding definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think China Harmony Auto Holding's payments are rock solid. While China Harmony Auto Holding is earning enough to cover the payments, the cash flows are lacking. This company is not in the top tier of income providing stocks.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 1 warning sign for China Harmony Auto Holding that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.