Could China Weaving Materials Holdings Limited (HKG:3778) 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. 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.
With a eight-year payment history and a 7.2% yield, many investors probably find China Weaving Materials Holdings intriguing. We’d agree the yield does look enticing. Some simple analysis can reduce the risk of holding China Weaving Materials Holdings for its dividend, and we’ll focus on the most important aspects below.
Explore this interactive chart for our latest analysis on China Weaving Materials Holdings!
SEHK:3778 Historical Dividend Yield, March 12th 2020
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. 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 Weaving Materials Holdings paid out 23% of its profit as dividends. We like this low payout ratio, because it implies the dividend is well covered and leaves ample opportunity for reinvestment.
Is China Weaving Materials Holdings’s Balance Sheet Risky?
As China Weaving Materials Holdings has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA is a measure of a company’s total debt. Net interest cover measures the ability to meet interest payments. Essentially we check that a) the company does not have too much debt, and b) that it can afford to pay the interest. With net debt of 2.56 times its EBITDA, China Weaving Materials Holdings has a noticeable amount of debt, although if business stays steady, this may not be overly concerning.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company’s net interest expense. With EBIT of 3.06 times its interest expense, China Weaving Materials Holdings’s interest cover is starting to look a bit thin.
Remember, you can always get a snapshot of China Weaving Materials Holdings’s latest financial position, by checking our visualisation of its financial health.
Dividend Volatility
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. The first recorded dividend for China Weaving Materials Holdings, in the last decade, was eight years ago. It’s good to see that China Weaving Materials Holdings has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we’re concerned that what has been cut once, could be cut again. During the past eight-year period, the first annual payment was CN¥0.015 in 2012, compared to CN¥0.026 last year. This works out to be a compound annual growth rate (CAGR) of approximately 7.8% a year over that time. China Weaving Materials Holdings’s dividend payments have fluctuated, so it hasn’t grown 7.8% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.
Dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we’re not certain this dividend stock would be ideal for someone intending to live on the income.
Dividend Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It’s good to see China Weaving Materials Holdings has been growing its earnings per share at 24% a year over the past five years. Earnings per share have grown rapidly, and the company is retaining a majority of its earnings. We think this is ideal from an investment perspective, if the company is able to reinvest these earnings effectively.
Conclusion
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Firstly, we like that China Weaving Materials Holdings has a low and conservative payout ratio. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. Overall, we think there are a lot of positives to China Weaving Materials Holdings from a dividend perspective.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. To that end, China Weaving Materials Holdings has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
If you spot an error that warrants correction, please contact the editor at [email protected]. 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.
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. Thank you for reading.