Perennial Energy Holdings Limited's (HKG:2798) dividend is being reduced from last year's payment covering the same period to CN¥0.05 on the 5th of July. The dividend yield of 4.1% is still a nice boost to shareholder returns, despite the cut.
View our latest analysis for Perennial Energy Holdings
Perennial Energy Holdings' Payment Has Solid Earnings Coverage
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Perennial Energy Holdings' earnings easily covered the dividend, but free cash flows were negative. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.
Over the next year, EPS could expand by 13.8% if recent trends continue. If the dividend continues on this path, the payout ratio could be 20% by next year, which we think can be pretty sustainable going forward.
Perennial Energy Holdings' Dividend Has Lacked Consistency
The track record isn't the longest, but we are already seeing a bit of instability in the payments. Since 2020, the annual payment back then was CN¥0.0207, compared to the most recent full-year payment of CN¥0.046. This implies that the company grew its distributions at a yearly rate of about 22% over that duration. Perennial Energy Holdings 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
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's encouraging to see that Perennial Energy Holdings has been growing its earnings per share at 14% a year over the past five years. With a decent amount of growth and a low payout ratio, we think this bodes well for Perennial Energy Holdings' prospects of growing its dividend payments in the future.
In Summary
Overall, it's not great to see that the dividend has been cut, but this might be explained by the payments being a bit high previously. While Perennial Energy Holdings is earning enough to cover the payments, the cash flows are lacking. We would probably look elsewhere for an income investment.
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 Perennial Energy Holdings (of which 1 is a bit concerning!) you should know about. Is Perennial Energy Holdings not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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