Here's How We Evaluate BeijingWest Industries International Limited's (HKG:2339) Dividend

Simply Wall St

Thu, Oct 17, 2019, 6:22 PM

Dividend paying stocks like BeijingWest Industries International Limited (HKG:2339) 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, BeijingWest Industries International pays a decent-sized 4.0% dividend yield, and has been distributing cash to shareholders for the past three years. A 4.0% yield does look good. Could the short payment history hint at future dividend growth? Some simple research can reduce the risk of buying BeijingWest Industries International for its dividend - read on to learn more.

Click the interactive chart for our full dividend analysis

SEHK:2339 Historical Dividend Yield, October 18th 2019

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. In the last year, BeijingWest Industries International paid out 10% of its profit as dividends. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Last year, BeijingWest Industries International paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

While the above analysis focuses on dividends relative to a company's earnings, we do note BeijingWest Industries International's strong net cash position, which will let it pay larger dividends for a time, should it choose.

We update our data on BeijingWest Industries International 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. This company's dividend has been unstable, and with a relatively short history, we think it's a little soon to draw strong conclusions about its long term dividend potential. Its most recent annual dividend was HK$0.02 per share, effectively flat on its first payment three years ago.

We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments, we don't think this is an attractive combination.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Over the past five years, it looks as though BeijingWest Industries International's EPS have declined at around 56% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and BeijingWest Industries International's earnings per share, which support the dividend, have been anything but stable.

Conclusion

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. Firstly, the company has a conservative payout ratio, although we'd note that its cashflow in the past year was substantially lower than its reported profit. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. With this information in mind, we think BeijingWest Industries International may not be an ideal dividend stock.

You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in BeijingWest Industries International stock.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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