Dividend paying stocks like China Pioneer Pharma Holdings Limited (HKG:1345) 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. 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.
In this case, China Pioneer Pharma Holdings likely looks attractive to dividend investors, given its 7.4% dividend yield and seven-year payment history. We’d agree the yield does look enticing. Some simple analysis can reduce the risk of holding China Pioneer Pharma Holdings for its dividend, and we’ll focus on the most important aspects below.
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 Pioneer Pharma Holdings paid out 317% of its profit as dividends, over the trailing twelve month period. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.
With a strong net cash balance, China Pioneer Pharma Holdings investors may not have much to worry about in the near term from a dividend perspective.
We update our data on China Pioneer Pharma Holdings every 24 hours, so you can always get our latest analysis of its financial health, here.
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 Pioneer Pharma Holdings has been paying a dividend for the past seven years. It’s good to see that China Pioneer Pharma Holdings has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we’re concerned that what has been cut once, could be cut again. During the past seven-year period, the first annual payment was CN¥0.1 in 2014, compared to CN¥0.06 last year. This works out to be a decline of approximately 7.1% per year over that time. China Pioneer Pharma Holdings’ dividend hasn’t shrunk linearly at 7.1% per annum, but the CAGR is a useful estimate of the historical rate of change.
We struggle to make a case for buying China Pioneer Pharma Holdings for its dividend, given that payments have shrunk over the past seven years.
Dividend Growth Potential
With a relatively unstable dividend, and a poor history of shrinking dividends, it’s even more important to see if EPS are growing. China Pioneer Pharma Holdings’ EPS have fallen by approximately 32% per year during the past five years. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.
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 Pioneer Pharma Holdings is paying out a larger percentage of its profit than we’re comfortable with. Earnings per share are down, and China Pioneer Pharma Holdings’ dividend has been cut at least once in the past, which is disappointing. With this information in mind, we think China Pioneer Pharma Holdings may not be an ideal dividend stock.
It’s important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Just as an example, we’ve come accross 4 warning signs for China Pioneer Pharma Holdings you should be aware of, and 1 of them is concerning.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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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. 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.
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