Is China Tian Lun Gas Holdings Limited (HKG:1600) A Smart Pick For Income Investors?

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Is China Tian Lun Gas Holdings Limited (HKG:1600) a good dividend stock? How would you know? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

Some readers mightn't know much about China Tian Lun Gas Holdings's 2.2% dividend, as it has only been paying distributions for the last three years. While it may not look like much, if earnings are growing it could become quite interesting. Some simple research can reduce the risk of buying China Tian Lun Gas Holdings for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on China Tian Lun Gas Holdings!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. China Tian Lun Gas Holdings paid out 27% of its profit as dividends, over the trailing twelve month period. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. Plus, there is room to increase the payout ratio over time.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. China Tian Lun Gas Holdings paid out 54% of its free cash flow last year, which is acceptable, but is starting to limit the amount of earnings that can be reinvested into the business. It's positive to see that China Tian Lun Gas Holdings's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Is China Tian Lun Gas Holdings's Balance Sheet Risky?

As China Tian Lun Gas Holdings has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A quick way to check a company's financial situation uses these two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA is a measure of a company's total debt. Net interest cover measures the ability to meet interest payments on debt. Essentially we check that a) a company does not have too much debt, and b) that it can afford to pay the interest. China Tian Lun Gas Holdings has net debt of more than 3x its EBITDA, which is getting towards the limit of most investors' comfort zones. Judicious use of debt can enhance shareholder returns, but also adds to the risk if something goes awry.

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 5.67 times its interest expense appears reasonable for China Tian Lun Gas Holdings, although we're conscious that even high interest cover doesn't make a company bulletproof.

Remember, you can always get a snapshot of China Tian Lun Gas Holdings's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. The company has been paying a stable dividend for a few years now, but we'd like to see more evidence of consistency over a longer period. During the past three-year period, the first annual payment was CN¥0.071 in 2016, compared to CN¥0.15 last year. Dividends per share have grown at approximately 29% per year over this time.

The dividend has been growing pretty quickly, which could be enough to get us interested even though the dividend history is relatively short. Further research may be warranted.

Dividend Growth Potential

The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. It's good to see China Tian Lun Gas Holdings has been growing its earnings per share at 23% a year over the past 5 years. Earnings per share have rocketed in recent times, and we like that the company is retaining more than half of its earnings to reinvest. However, always remember that very few companies can grow at double digit rates forever.

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 Tian Lun Gas Holdings's dividend payout ratios are within normal bounds, although we note its cash flow is not as strong as the income statement would suggest. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we'd like. Overall we think China Tian Lun Gas Holdings is an interesting dividend stock, although it could be better.

Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 11 analysts we track are forecasting for China Tian Lun Gas Holdings for free with public analyst estimates for the company.

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.