Should You Buy China Petrochemical Development Corporation (TPE:1314) For Its Dividend?

Dividend paying stocks like China Petrochemical Development Corporation (TPE:1314) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

A slim 2.8% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, China Petrochemical Development could have potential. Some simple analysis can reduce the risk of holding China Petrochemical Development for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on China Petrochemical Development!

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. Looking at the data, we can see that 145% of China Petrochemical Development's profits were paid out as dividends in the last 12 months. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Last year, China Petrochemical Development paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

We update our data on China Petrochemical Development every 24 hours, so you can always get our latest analysis of its financial health, here.

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. For the purpose of this article, we only scrutinise the last decade of China Petrochemical Development's dividend payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was NT$0.7 in 2011, compared to NT$0.3 last year. The dividend has shrunk at around 8.6% a year during that period. China Petrochemical Development's dividend hasn't shrunk linearly at 8.6% per annum, but the CAGR is a useful estimate of the historical rate of change.

We struggle to make a case for buying China Petrochemical Development for its dividend, given that payments have shrunk over the past 10 years.

Dividend Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. It's good to see China Petrochemical Development has been growing its earnings per share at 24% a year over the past five years. Earnings per share have been growing very rapidly, although the company is also paying out virtually all of its profit in dividends. While EPS could grow fast enough to make the dividend sustainable, in this type of situation, we'd want to pay extra attention to any fragilities in the company's balance sheet.

We'd also point out that China Petrochemical Development 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

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. We're a bit uncomfortable with China Petrochemical Development paying out a high percentage of both its cashflow and earnings. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. In summary, China Petrochemical Development has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Case in point: We've spotted 2 warning signs for China Petrochemical Development (of which 1 doesn't sit too well with us!) you should know about.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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