Could Tianjin Tianbao Energy Co., Ltd. (HKG:1671) Have The Makings Of Another Dividend Aristocrat?

Is Tianjin Tianbao Energy Co., Ltd. (HKG:1671) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

In this case, Tianjin Tianbao Energy pays a decent-sized 5.0% dividend yield, and has been distributing cash to shareholders for the past two years. It's certainly an attractive yield, but readers are likely curious about its staying power. The company also bought back stock during the year, equivalent to approximately 35% of the company's market capitalisation at the time. Some simple analysis can reduce the risk of holding Tianjin Tianbao Energy for its dividend, and we'll focus on the most important aspects below.

Click the interactive chart for our full dividend analysis

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Looking at the data, we can see that 43% of Tianjin Tianbao Energy's profits were paid out as dividends in the last 12 months. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Tianjin Tianbao Energy paid out 69% of its free cash flow last year, which is acceptable, but is starting to limit the amount of earnings that can be reinvested into the business. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Remember, you can always get a snapshot of Tianjin Tianbao Energy's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. This company's dividend has been unstable, and with a relatively short history, we think it's a little soon to draw strong conclusions about its long term dividend potential. During the past two-year period, the first annual payment was CN¥0.08 in 2019, compared to CN¥0.03 last year. The dividend has fallen 66% over that period.

We struggle to make a case for buying Tianjin Tianbao Energy for its dividend, given that payments have shrunk over the past two years.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Tianjin Tianbao Energy's EPS have fallen by approximately 32% 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 Tianjin Tianbao Energy's earnings per share, which support the dividend, have been anything but stable.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Tianjin Tianbao Energy's dividend payout ratios are within normal bounds, although we note its cash flow is not as strong as the income statement would suggest. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In sum, we find it hard to get excited about Tianjin Tianbao Energy from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. To that end, Tianjin Tianbao Energy has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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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