Shanghai Fudan-Zhangjiang Bio-Pharmaceutical Co., Ltd.'s (HKG:1349) 1.7% Dividend Yield Looks Pretty Interesting
Dividend paying stocks like Shanghai Fudan-Zhangjiang Bio-Pharmaceutical Co., Ltd. (HKG:1349) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
With a 1.7% yield and a five-year payment history, investors probably think Shanghai Fudan-Zhangjiang Bio-Pharmaceutical looks like a reliable dividend stock. A low yield is generally a turn-off, but if the prospects for earnings growth were strong, investors might be pleasantly surprised by the long-term results. There are a few simple ways to reduce the risks of buying Shanghai Fudan-Zhangjiang Bio-Pharmaceutical for its dividend, and we'll go through these below.
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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Shanghai Fudan-Zhangjiang Bio-Pharmaceutical paid out 34% 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. Plus, there is room to increase the payout ratio over time.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Shanghai Fudan-Zhangjiang Bio-Pharmaceutical paid out 13% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
With a strong net cash balance, Shanghai Fudan-Zhangjiang Bio-Pharmaceutical investors may not have much to worry about in the near term from a dividend perspective.
Remember, you can always get a snapshot of Shanghai Fudan-Zhangjiang Bio-Pharmaceutical's latest financial position, by checking our visualisation of its financial health.
Dividend Volatility
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the data, we can see that Shanghai Fudan-Zhangjiang Bio-Pharmaceutical has been paying a dividend for the past five years. During the past five-year period, the first annual payment was CN¥0.05 in 2015, compared to CN¥0.07 last year. Dividends per share have grown at approximately 7.0% per year over this time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.
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 Potential
With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. It's good to see Shanghai Fudan-Zhangjiang Bio-Pharmaceutical has been growing its earnings per share at 15% a year over the past five years. A company paying out less than a quarter of its earnings as dividends, and growing earnings at more than 10% per annum, looks to be right in the cusp of its growth phase. At the right price, we might be interested.
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. It's great to see that Shanghai Fudan-Zhangjiang Bio-Pharmaceutical is paying out a low percentage of its earnings and cash flow. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. All things considered, Shanghai Fudan-Zhangjiang Bio-Pharmaceutical looks like a strong prospect. At the right valuation, it could be something special.
Are management backing themselves to deliver performance? Check their shareholdings in Shanghai Fudan-Zhangjiang Bio-Pharmaceutical in our latest insider ownership analysis.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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.
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