Today we’ll take a closer look at Virscend Education Company Limited (HKG:1565) 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. 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.
Virscend Education pays a 4.4% dividend yield, and has been paying dividends for the past three years. A high yield probably looks enticing, but investors are likely wondering about the short payment history. Some simple analysis can reduce the risk of holding Virscend Education for its dividend, and we’ll focus on the most important aspects below.
Click the interactive chart for our full dividend analysis
SEHK:1565 Historical Dividend Yield, February 3rd 2020
Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. 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, Virscend Education paid out 58% of its profit as dividends. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business – which could be good or bad.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. The company paid out 81% 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 positive to see that Virscend Education’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 Virscend Education 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. It has only been paying dividends for a few short years, and the dividend has already been cut at least once. This is one income stream we’re not ready to live on. During the past three-year period, the first annual payment was CN¥0.056 in 2017, compared to CN¥0.071 last year. This works out to be a compound annual growth rate (CAGR) of approximately 8.1% a year over that time. The dividends haven’t grown at precisely 8.1% every year, but this is a useful way to average out the historical rate of growth.
A reasonable rate of dividend growth is good to see, but we’re wary that the dividend history is not as solid as we’d like, having been cut at least once.
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. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Virscend Education has grown its earnings per share at 36% per annum over the past three years. With recent, rapid earnings per share growth and a payout ratio of 58%, this business looks like an interesting prospect if earnings are reinvested 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. Virscend Education’s is paying out more than half its income as dividends, but at least the dividend is covered by both reported earnings and cashflow. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. Ultimately, Virscend Education comes up short on our dividend analysis. It’s not that we think it is a bad company – just that there are likely more appealing dividend prospects out there on this analysis.
Now, if you want to look closer, it would be worth checking out our free research on Virscend Education management tenure, salary, and performance.
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 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.
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.