Should You Buy China Electronics Optics Valley Union Holding Company Limited (HKG:798) For Its 4.6% Dividend?
Could China Electronics Optics Valley Union Holding Company Limited (HKG:798) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
With a goodly-sized dividend yield despite a relatively short payment history, investors might be wondering if China Electronics Optics Valley Union Holding is a new dividend aristocrat in the making. It sure looks interesting on these metrics - but there's always more to the story . The company also bought back stock equivalent to around 1.5% of market capitalisation this year. Some simple research can reduce the risk of buying China Electronics Optics Valley Union Holding for its dividend - read on to learn more.
Payout ratios
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. China Electronics Optics Valley Union Holding paid out 30% of its profit as dividends, over the trailing twelve month period. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Unfortunately, while China Electronics Optics Valley Union Holding pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.
Is China Electronics Optics Valley Union Holding's Balance Sheet Risky?
As China Electronics Optics Valley Union Holding has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A quick check of its financial situation can be done with two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). With net debt of 4.19 times its EBITDA, investors are starting to take on a meaningful amount of risk, should the business enter a downturn.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company's net interest expense. Net interest cover of 6.17 times its interest expense appears reasonable for China Electronics Optics Valley Union Holding, although we're conscious that even high interest cover doesn't make a company bulletproof.
Consider getting our latest analysis on China Electronics Optics Valley Union Holding's financial position here.
Dividend Volatility
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. China Electronics Optics Valley Union Holding has been paying a dividend for the past five years. During the past five-year period, the first annual payment was CN¥0.025 in 2014, compared to CN¥0.022 last year. This works out to be a decline of approximately 2.6% per year over that time. China Electronics Optics Valley Union Holding's dividend has been cut sharply at least once, so it hasn't fallen by 2.6% every year, but this is a decent approximation of the long term change.
A shrinking dividend over a five-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.
Dividend Growth Potential
With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? It's not great to see that China Electronics Optics Valley Union Holding's have fallen at approximately 9.5% over the past five years. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.
Conclusion
Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. China Electronics Optics Valley Union Holding has a low payout ratio, which we like, although it paid out virtually all of its generated cash. Unfortunately, the company has not been able to generate earnings per share growth, and cut its dividend at least once in the past. In summary, China Electronics Optics Valley Union Holding has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.
Now, if you want to look closer, it would be worth checking out our free research on China Electronics Optics Valley Union Holding management tenure, salary, and performance.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
