What To Know Before Buying Zhongguancun Science-Tech Leasing Co., Ltd. (HKG:1601) For Its Dividend

Today we’ll take a closer look at Zhongguancun Science-Tech Leasing Co., Ltd. (HKG:1601) 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.

Remember that the recent share price drop will make Zhongguancun Science-Tech Leasing’s yield look higher, even though recent events might have impacted the company’s prospects. Some simple research can reduce the risk of buying Zhongguancun Science-Tech Leasing for its dividend – read on to learn more.

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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, Zhongguancun Science-Tech Leasing paid out 27% of its profit as dividends. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. Plus, there is room to increase the payout ratio over time.

Consider getting our latest analysis on Zhongguancun Science-Tech Leasing’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. This company has been paying a dividend for less than 2 years, which we think is too soon to consider it a reliable dividend stock. Its most recent annual dividend was CN¥0.037 per share.

Modest dividend growth is good to see, especially with the payments being relatively stable. However, the payment history is relatively short and we wouldn’t want to rely on this dividend too much.

Dividend Growth Potential

The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. It’s not great to see that Zhongguancun Science-Tech Leasing’s have fallen at approximately 3.5% over the past five years. A modest decline in earnings per share is not great to see, but it doesn’t automatically make a dividend unsustainable. Still, we’d vastly prefer to see EPS growth when researching dividend stocks.

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, we like that Zhongguancun Science-Tech Leasing has a low and conservative payout ratio. Earnings per share have been falling, and the company has a relatively short dividend history – shorter than we like, anyway. In summary, we’re unenthused by Zhongguancun Science-Tech Leasing as a dividend stock. It’s not that we think it is a bad company; it simply falls short of our criteria in some key areas.

It’s important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, Zhongguancun Science-Tech Leasing has 3 warning signs (and 1 which doesn’t sit too well with us) we think you should know about.

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