Chongqing Bank Co., Ltd. (HKG: 1963) announced that it would increase its dividend on July 9 to HK $ 0.45. This will bring the dividend yield to an attractive 8.2%, offering a good boost in returns for shareholders.
Check out our latest analysis for Bank of Chongqing
Chongqing Bank payment enjoys strong income coverage
Awesome dividend yields are good, but it doesn’t matter much if the payouts can’t be sustained. Prior to this announcement, Bank of Chongqing’s earnings easily covered the dividend, but free cash flow was negative. We believe cash flow should take priority over earnings, so that’s definitely a concern for the dividend going forward.
Going forward, earnings per share are expected to increase 6.3% over the next year. If the dividend continues on that path, the payout ratio could be 32% by next year, which we believe can be quite sustainable going forward.
Bank of Chongqing dividend lacks consistency
Looking back, Bank of Chongqing’s dividend has not been particularly consistent. This suggests that the dividend may not be the most reliable. The dividend went from CNY 0.22 in 2014 to the last annual payment of CNY 0.37. This means that he increased his distributions by 7.6% per year during this period. It’s good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. The Bank of Chongqing may have cleaned up his house since, but we remain cautious.
We could see Bank of Chongqing dividend increase
Since the dividend has been reduced in the past, we need to check if the profits are increasing and if this could lead to higher dividends in the future. Earnings per share climbed to 2.2% per year. Earnings growth is slow, but on the bright side, the dividend payout ratio is low and dividends could grow faster than earnings, if the company decides to increase its payout ratio.
We also draw your attention to the fact that Chongqing Bank issued shares equal to 11% of the outstanding shares. Trying to increase the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus – perpetually pushing a rock uphill. Companies that regularly issue new shares are often sub-optimal from a dividend standpoint.
Overall, we still like to see the dividend go up, but we don’t think Bank of Chongqing will make a good income. Although Bank of Chongqing earns enough to cover the dividend, we are generally not impressed with its prospects for the future. This company is not part of the first income level providing shares.
Firms with a stable dividend policy will likely benefit from greater investor interest than those with a more inconsistent approach. At the same time, there are other factors that our readers should be aware of before injecting capital into a stock. Taking the debate a little further, we have identified 2 warning signs for Bank of Chongqing that investors need to be aware of moving forward. Looking for more high yield dividend ideas? Try our organized list of good dividend payers.
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