Shandong Xinhua Pharmaceutical Company Limited (HKG:719) will increase its dividend from last year's comparable payment on the 30th of July to CN¥0.2741. This will take the dividend yield to an attractive 5.0%, providing a nice boost to shareholder returns.
See our latest analysis for Shandong Xinhua Pharmaceutical
Shandong Xinhua Pharmaceutical's Dividend Is Well Covered By Earnings
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before making this announcement, Shandong Xinhua Pharmaceutical was paying a whopping 103% as a dividend, but this only made up 35% of its overall earnings. The business might be trying to strike a balance between returning cash to shareholders and reinvesting back into the business, but this high of a payout ratio could definitely force the dividend to be cut if the company runs into a bit of a tough spot.
Looking forward, earnings per share could rise by 11.2% over the next year if the trend from the last few years continues. If the dividend continues on this path, the payout ratio could be 43% by next year, which we think can be pretty sustainable going forward.
Dividend Volatility
The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2014, the annual payment back then was CN¥0.0154, compared to the most recent full-year payment of CN¥0.25. This means that it has been growing its distributions at 32% per annum over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.
The Dividend Looks Likely To Grow
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. We are encouraged to see that Shandong Xinhua Pharmaceutical has grown earnings per share at 11% per year over the past five years. Growth in EPS bodes well for the dividend, as does the low payout ratio that the company is currently reporting.
In Summary
Overall, we always like to see the dividend being raised, but we don't think Shandong Xinhua Pharmaceutical will make a great income stock. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We don't think Shandong Xinhua Pharmaceutical is a great stock to add to your portfolio if income is your focus.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 1 warning sign for Shandong Xinhua Pharmaceutical that investors should know about before committing capital to this stock. Is Shandong Xinhua Pharmaceutical not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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