Zhongzhi Pharmaceutical Holdings Limited's (HKG:3737) dividend will be increasing from last year's payment of the same period to CN¥0.05 on 19th of June. This makes the dividend yield 5.5%, which is above the industry average.
Zhongzhi Pharmaceutical Holdings' Payment Could Potentially Have Solid Earnings Coverage
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Based on the last dividend, Zhongzhi Pharmaceutical Holdings is earning enough to cover the payment, but then it makes up 109% of cash flows. This signals that the company is more focused on returning cash flow to shareholders, but it could mean that the dividend is exposed to cuts in the future.
Looking forward, EPS could fall by 4.3% if the company can't turn things around from the last few years. Assuming the dividend continues along recent trends, we believe the payout ratio could be 51%, which we are pretty comfortable with and we think is feasible on an earnings basis.
View our latest analysis for Zhongzhi Pharmaceutical Holdings
Zhongzhi Pharmaceutical Holdings' Dividend Has Lacked Consistency
Even in its relatively short history, the company has reduced the dividend at least once. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. The annual payment during the last 9 years was CN¥0.0294 in 2016, and the most recent fiscal year payment was CN¥0.047. This means that it has been growing its distributions at 5.3% per annum over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Zhongzhi Pharmaceutical Holdings might have put its house in order since then, but we remain cautious.
Zhongzhi Pharmaceutical Holdings May Find It Hard To Grow The Dividend
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's not great to see that Zhongzhi Pharmaceutical Holdings' earnings per share has fallen at approximately 4.3% per year over the past five years. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits.
The Dividend Could Prove To Be Unreliable
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We don't think Zhongzhi Pharmaceutical Holdings is a great stock to add to your portfolio if income is your focus.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 2 warning signs for Zhongzhi Pharmaceutical Holdings that investors need to be conscious of moving forward. Is Zhongzhi Pharmaceutical Holdings not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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