Something To Consider Before Buying Chanjet Information Technology Company Limited (HKG:1588) For The 3.6% Dividend

Could Chanjet Information Technology Company Limited (HKG:1588) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

With a goodly-sized dividend yield despite a relatively short payment history, investors might be wondering if Chanjet Information Technology is a new dividend aristocrat in the making. We'd agree the yield does look enticing. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Explore this interactive chart for our latest analysis on Chanjet Information Technology!

Payout ratios

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. 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, Chanjet Information Technology paid out 483% of its profit as dividends. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Chanjet Information Technology paid out 101% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. Cash is slightly more important than profit from a dividend perspective, but given Chanjet Information Technology's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

With a strong net cash balance, Chanjet Information Technology investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on Chanjet Information Technology'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. Looking at the data, we can see that Chanjet Information Technology has been paying a dividend for the past six years. It's good to see that Chanjet Information Technology 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 CN¥0.4 in 2015, compared to CN¥0.4 last year. Its dividends have grown at less than 1% per annum over this time frame.

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

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. Chanjet Information Technology's EPS have fallen by approximately 26% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Chanjet Information Technology's earnings per share, which support the dividend, have been anything but stable.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Chanjet Information Technology paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. Using these criteria, Chanjet Information Technology looks quite suboptimal from a dividend investment perspective.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. As an example, we've identified 3 warning signs for Chanjet Information Technology that you should be aware of before investing.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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