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Today we'll take a closer look at Guangzhou Baiyunshan Pharmaceutical Holdings Company Limited (HKG:874) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
A slim 1.9% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Guangzhou Baiyunshan Pharmaceutical Holdings could have potential. Some simple research can reduce the risk of buying Guangzhou Baiyunshan Pharmaceutical Holdings for its dividend - read on to learn more.
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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Guangzhou Baiyunshan Pharmaceutical Holdings paid out 22% of its profit as dividends, over the trailing twelve month period. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Guangzhou Baiyunshan Pharmaceutical Holdings paid out 110% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. Guangzhou Baiyunshan Pharmaceutical Holdings paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough free cash flow to cover the dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to Guangzhou Baiyunshan Pharmaceutical Holdings's ability to maintain its dividend.
While the above analysis focuses on dividends relative to a company's earnings, we do note Guangzhou Baiyunshan Pharmaceutical Holdings's strong net cash position, which will let it pay larger dividends for a time, should it choose.
We update our data on Guangzhou Baiyunshan Pharmaceutical 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. Guangzhou Baiyunshan Pharmaceutical Holdings has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have declined on at least one occasion over the past ten years. During the past ten-year period, the first annual payment was CN¥0.04 in 2010, compared to CN¥0.42 last year. Dividends per share have grown at approximately 27% per year over this time. Guangzhou Baiyunshan Pharmaceutical Holdings's dividend payments have fluctuated, so it hasn't grown 27% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.