Huali University Group (HKG:1756) shareholders will receive lower dividend than last year

Huali University Group Limited (HKG: 1756) dividend is reduced to HK$0.05 on March 16. Yield is still above the industry average at 9.2%.

Check out our latest analysis for Huali University Group

Huali University Group payment has strong revenue coverage

We like to see strong dividend yields, but that doesn’t matter if the payout isn’t sustainable. Prior to this announcement, Huali University Group’s earnings easily covered the dividend, but free cash flow was negative. Since the company does not provide cash, payment to shareholders will become difficult at some point.

Going forward, earnings per share are expected to increase exponentially over the next year. If the dividend continues its recent trend, estimates indicate that the dividend could reach 31%, which we would be comfortable seeing continue.

SEHK: 1756 Historic Dividend January 23, 2022

Huali University Group’s dividend lacked consistency

In retrospect, the dividend has been volatile, but with a relatively short history, we believe it may be a bit early to draw conclusions about the long-term sustainability of the dividend. The first annual payment in the past 2 years was CN¥0.10 in 2020, and the most recent year’s payment was CN¥0.041. The dividend fell by 60% over this period. A company that decreases its dividend over time is generally not what we are looking for.

The dividend has limited growth potential

Since the track record hasn’t been great, we really want to see earnings per share increase over time. Over the past five years, it seems that the EPS of Huali University Group has decreased by about 22% per year. A sharp drop in earnings per share is not great from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall enough. Over the next year, however, earnings should actually rise, but we will remain cautious until a track record of earnings growth can be established.

Dividend could prove unreliable

In summary, cutting dividends isn’t ideal, but it can bring the payout back into a more sustainable range. With no cash flow, it’s hard to see how the company can sustain a dividend payment. We would be a bit cautious to rely on this stock primarily for dividend income.

Investors generally tend to favor companies with a consistent and stable dividend policy as opposed to those with an irregular one. At the same time, there are other factors that our readers should be aware of before investing capital in a stock. For example, we chose 5 warning signs for Huali University Group that investors should consider. Looking for more high yield dividend ideas? Try our curated list of strong dividend payers.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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