Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Dividend paying stocks like United Strength Power Holdings Limited (HKG:2337) 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.
United Strength Power Holdings has only been paying a dividend for a year or so, so investors might be curious about its 1.6% yield. Some simple analysis can reduce the risk of holding United Strength Power Holdings for its dividend, and we'll focus on the most important aspects below.
SEHK:2337 Historical Dividend Yield, July 10th 2019
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. Looking at the data, we can see that 41% of United Strength Power Holdings's profits were paid out as dividends in the last 12 months. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Last year, United Strength Power Holdings paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.
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. During the past one-year period, the first annual payment was CN¥0.04 in 2018, compared to CN¥0.073 last year. Dividends per share have grown at approximately 82% per year over this time.
We're not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.
Dividend Growth Potential
Examining whether the dividend is affordable and stable is important. However, it's also important to assess if earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. United Strength Power Holdings has grown its EPS 262% over the past 12 months. We're glad to see EPS up on last year, but we're conscious that growth rates typically slow as companies increase in size. 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. We do note though, one year is too short a time to be drawing strong conclusions about a company's future prospects.
We'd also point out that United Strength Power Holdings issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.
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. First, we like United Strength Power Holdings's low dividend payout ratio, although we're a bit concerned that it paid out a substantially higher percentage of its free cash flow. We were also glad to see it growing earnings, although its dividend history is not as long as we'd like. In sum, we find it hard to get excited about United Strength Power Holdings from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.
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.
