Lee & Man Chemical Company Limited (HKG:746) will increase its dividend from last year's comparable payment on the 3rd of June to HK$0.15. Based on this payment, the dividend yield for the company will be 8.5%, which is fairly typical for the industry.
Lee & Man Chemical's Projected Earnings Seem Likely To Cover Future Distributions
Unless the payments are sustainable, the dividend yield doesn't mean too much. Lee & Man Chemical was earning enough to cover the previous dividend, but it was paying out quite a large proportion of its free cash flows. The business is earning enough to make the dividend feasible, but the cash payout ratio of 85% indicates it is more focused on returning cash to shareholders than growing the business.
Looking forward, EPS could fall by 7.2% 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 59%, which we are pretty comfortable with and we think is feasible on an earnings basis.
Check out our latest analysis for Lee & Man Chemical
Dividend Volatility
The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The annual payment during the last 10 years was HK$0.14 in 2015, and the most recent fiscal year payment was HK$0.30. This implies that the company grew its distributions at a yearly rate of about 7.9% over that duration. A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.
Dividend Growth Is Doubtful
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. Lee & Man Chemical has seen earnings per share falling at 7.2% per year over the last five years. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends.
In Summary
Overall, we always like to see the dividend being raised, but we don't think Lee & Man Chemical will make a great income stock. While Lee & Man Chemical is earning enough to cover the dividend, we are generally unimpressed with its future prospects. We would be a touch cautious of relying on this stock primarily for the dividend income.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Just as an example, we've come across 2 warning signs for Lee & Man Chemical you should be aware of, and 1 of them is a bit unpleasant. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.