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Could China Resources Cement Holdings Limited (HKG:1313) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the 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.
With a eight-year payment history and a 8.0% yield, many investors probably find China Resources Cement Holdings intriguing. We'd agree the yield does look enticing. There are a few simple ways to reduce the risks of buying China Resources Cement Holdings for its dividend, and we'll go through these below.
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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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, China Resources Cement Holdings paid out 49% of its profit as dividends. This is medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Of the free cash flow it generated last year, China Resources Cement Holdings paid out 29% as dividends, suggesting the dividend is affordable. It's positive to see that China Resources Cement Holdings's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
We update our data on China Resources Cement Holdings every 24 hours, so you can always get our latest analysis of its financial health, here.
Dividend Volatility
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. Looking at the last decade of data, we can see that China Resources Cement Holdings paid its first dividend at least eight years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once by more than 20%, and we're cautious about the consistency of its dividend across a full economic cycle. During the past eight-year period, the first annual payment was HK$0.045 in 2011, compared to HK$0.55 last year. Dividends per share have grown at approximately 37% per year over this time. The dividends haven't grown at precisely 37% every year, but this is a useful way to average out the historical rate of growth.