Dividend paying stocks like Wuxi Sunlit Science and Technology Company Limited (HKG:1289) 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. 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.
In this case, Wuxi Sunlit Science and Technology likely looks attractive to dividend investors, given its 5.2% dividend yield and five-year payment history. We’d agree the yield does look enticing. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we’ll go through this below.
Explore this interactive chart for our latest analysis on Wuxi Sunlit Science and Technology!
SEHK:1289 Historical Dividend Yield, March 2nd 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. 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, Wuxi Sunlit Science and Technology paid out 81% of its profit as dividends. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. The company paid out 85% of its free cash flow as dividends last year, which is adequate, but reduces the wriggle room in the event of a downturn. It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
While the above analysis focuses on dividends relative to a company’s earnings, we do note Wuxi Sunlit Science and Technology’s strong net cash position, which will let it pay larger dividends for a time, should it choose.
Consider getting our latest analysis on Wuxi Sunlit Science and Technology’s financial position here.
Dividend Volatility
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Wuxi Sunlit Science and Technology has been paying a dividend for the past five years. During the past five-year period, the first annual payment was CN¥0.15 in 2015, compared to CN¥0.05 last year. This works out to a decline of approximately 67% over that time.
We struggle to make a case for buying Wuxi Sunlit Science and Technology for its dividend, given that payments have shrunk over the past five years.
Dividend Growth Potential
With a relatively unstable dividend, and a poor history of shrinking dividends, it’s even more important to see if EPS are growing. Wuxi Sunlit Science and Technology’s earnings per share have shrunk at 46% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Wuxi Sunlit Science and Technology’s earnings per share, which support the dividend, have been anything but stable.
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. First, we think Wuxi Sunlit Science and Technology is paying out an acceptable percentage of its cashflow and profit. Earnings per share are down, and Wuxi Sunlit Science and Technology’s dividend has been cut at least once in the past, which is disappointing. In summary, Wuxi Sunlit Science and Technology has a number of shortcomings that we’d find it hard to get past. Things could change, but we think there are a number of better ideas out there.
Are management backing themselves to deliver performance? Check their shareholdings in Wuxi Sunlit Science and Technology in our latest insider ownership analysis.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding 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.
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