Dividend paying stocks like Beijing Tong Ren Tang Chinese Medicine Company Limited (HKG:3613) 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 the income from dividends, it’s important to be a lot more stringent with your investments than the average punter.
With a 2.8% yield and a seven-year payment history, investors probably think Beijing Tong Ren Tang Chinese Medicine looks like a reliable dividend stock. A low yield is generally a turn-off, but if the prospects for earnings growth were strong, investors might be pleasantly surprised by the long-term results. Some simple analysis can reduce the risk of holding Beijing Tong Ren Tang Chinese Medicine for its dividend, and we’ll focus on the most important aspects below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. 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 45% of Beijing Tong Ren Tang Chinese Medicine’s profits were paid out as dividends in the last 12 months. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. The company paid out 66% of its free cash flow, which is not bad per se, but does start to limit the amount of cash Beijing Tong Ren Tang Chinese Medicine has available to meet other needs. 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.
While the above analysis focuses on dividends relative to a company’s earnings, we do note Beijing Tong Ren Tang Chinese Medicine’s strong net cash position, which will let it pay larger dividends for a time, should it choose.
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. Beijing Tong Ren Tang Chinese Medicine has been paying a dividend for the past seven years. It’s good to see that Beijing Tong Ren Tang Chinese Medicine 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 seven-year period, the first annual payment was HK$0.2 in 2014, compared to HK$0.2 last year. This works out to be a compound annual growth rate (CAGR) of approximately 4.6% a year over that time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.
We’re glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments, we don’t think this is an attractive combination.
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. Beijing Tong Ren Tang Chinese Medicine has grown its earnings per share at 5.7% per annum over the past five years. Earnings per share have been growing at a credible rate. What’s more, the payout ratio is reasonable and provides some protection to the dividend, or even the potential to increase it.
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. Beijing Tong Ren Tang Chinese Medicine’s dividend payout ratios are within normal bounds, although we note its cash flow is not as strong as the income statement would suggest. Unfortunately, earnings growth has also been mediocre, and the company has cut its dividend at least once in the past. Ultimately, Beijing Tong Ren Tang Chinese Medicine comes up short on our dividend analysis. It’s not that we think it is a bad company – just that there are likely more appealing dividend prospects out there on this analysis.
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. For example, we’ve picked out 1 warning sign for Beijing Tong Ren Tang Chinese Medicine that investors should know about before committing capital to this stock.
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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