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The board of China Everbright Water Limited (SGX:U9E) has announced that it will pay a dividend on the 23rd of May, with investors receiving HK$0.0102 per share. This means the annual payment is 8.4% of the current stock price, which is above the average for the industry.
China Everbright Water's Payment Could Potentially Have Solid Earnings Coverage
A big dividend yield for a few years doesn't mean much if it can't be sustained. China Everbright Water is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.
Over the next year, EPS could expand by 3.5% if recent trends continue. Assuming the dividend continues along recent trends, we think the payout ratio could be 6.6% by next year, which is in a pretty sustainable range.
See our latest analysis for China Everbright Water
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. The annual payment during the last 9 years was HK$0.0187 in 2016, and the most recent fiscal year payment was HK$0.119. This works out to be a compound annual growth rate (CAGR) of approximately 23% a year over that time. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.
The Dividend's Growth Prospects Are Limited
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Earnings has been rising at 3.5% per annum over the last five years, which admittedly is a bit slow. If China Everbright Water is struggling to find viable investments, it always has the option to increase its payout ratio to pay more to shareholders.
In Summary
Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. While China Everbright Water is earning enough to cover the payments, the cash flows are lacking. We would be a touch cautious of relying on this stock primarily for the dividend income.