The board of Hengfeng Information Technology Co., Ltd. (SZSE:300605) has announced that it will pay a dividend on the 3rd of July, with investors receiving CN¥0.04 per share. This means the annual payment will be 0.4% of the current stock price, which is lower than the industry average.
Hengfeng Information Technology Doesn’t Earn Enough To Cover Its Payments
The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. Based on the last payment, earnings were actually smaller than the dividend, and the company was actually spending more cash than it was making. Paying out such a large dividend compared to earnings while also not generating any free cash flow would definitely be difficult to keep up.
EPS is set to fall by 33.4% over the next 12 months if recent trends continue. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 148%, which is definitely a bit high to be sustainable going forward.
Hengfeng Information Technology’s Dividend Has Lacked Consistency
It’s comforting to see that Hengfeng Information Technology has been paying a dividend for a number of years now, however it has been cut at least once in that time. If the company cuts once, it definitely isn’t argument against the possibility of it cutting in the future. The dividend has gone from an annual total of CN¥0.0257 in 2017 to the most recent total annual payment of CN¥0.04. This implies that the company grew its distributions at a yearly rate of about 6.5% over that duration. It’s good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Hengfeng Information Technology might have put its house in order since then, but we remain cautious.
Dividend Growth Potential Is Shaky
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Hengfeng Information Technology’s earnings per share has shrunk at 33% a year over the past five years. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future.
We’re Not Big Fans Of Hengfeng Information Technology’s Dividend
Overall, while some might be pleased that the dividend wasn’t cut, we think this may help Hengfeng Information Technology make more consistent payments in the future. The company seems to be stretching itself a bit to make such big payments, but it doesn’t appear they can be consistent over time. Overall, the dividend is not reliable enough to make this a good income stock. Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Hengfeng Information Technology has 5 warning signs (and 2 which are potentially serious) we think you should know about. Is Hengfeng Information Technology not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.