China Everbright Water Limited (SGX:U9E) has announced that on 24th of May, it will be paying a dividend ofHK$0.0086, which a reduction from last year’s comparable dividend. The yield is still above the industry average at 8.7%.
Check out our latest analysis for China Everbright Water
China Everbright Water’s Payment Has Solid Earnings Coverage
We like to see robust dividend yields, but that doesn’t matter if the payment isn’t sustainable. Prior to this announcement, China Everbright Water’s earnings easily covered the dividend, but free cash flows were negative. With the company not bringing in any cash, paying out to shareholders is bound to become difficult at some point.
If the trend of the last few years continues, EPS will grow by 20.3% over the next 12 months. Assuming the dividend continues along recent trends, we think the payout ratio could be 4.9% by next year, which is in a pretty sustainable range.
China Everbright Water’s Dividend Has Lacked Consistency
It’s comforting to see that China Everbright Water has been paying a dividend for a number of years now, however it has been cut at least once in that time. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. Since 2016, the dividend has gone from HK$0.0187 total annually to HK$0.107. This means that it has been growing its distributions at 28% per annum over that time. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.
The Dividend Looks Likely To Grow
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It’s encouraging to see that China Everbright Water has been growing its earnings per share at 20% a year over the past five years. Rapid earnings growth and a low payout ratio suggest this company has been effectively reinvesting in its business. Should that continue, this company could have a bright future.
Our Thoughts On China Everbright Water’s Dividend
In summary, dividends being cut isn’t ideal, however it can bring the payment into a more sustainable range. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. Overall, we don’t think this company has the makings of a good income stock.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we’ve identified 3 warning signs for China Everbright Water (1 is significant!) that you should be aware of before investing. Is China Everbright Water not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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