China Education Group Holdings Limited (HKG: 839) the dividend will increase to HK $ 0.20 on March 14. The announced payout will bring the dividend yield to 2.7%, which is in line with the industry average.
See our latest analysis for China Education Group Holdings
China Education Group Holdings dividend well covered by earnings
While it’s always good to see a solid dividend yield, we also need to determine if the payout is achievable. Prior to this announcement, China Education Group Holdings earnings easily covered the dividend, but free cash flow was negative. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.
Going forward, earnings per share are expected to increase by 14.3% over the next year. If the dividend continues according to recent trends, we estimate that the payout ratio will be 58%, which is within the range that puts us at ease with the sustainability of the dividend.
China Education Group Holdings does not have a long payment history
Looking back, the dividend has been stable, but the company has not paid a dividend for a very long time, so we cannot be sure that the dividend will remain stable in all economic environments. The dividend went from CN 0.065 in 2018 to the last annual payment of CN 0.33. This implies that the company has increased its distributions at an annual rate of approximately 72% over that time. The dividend has grown rapidly, but with such a short payment history, we cannot be sure whether the payout can continue to increase over the long term, so caution may be warranted.
The dividend seems likely to increase
Investors who have held shares of the company for the past several years will be pleased with the dividend income they have received. It is encouraging to see that China Education Group Holdings has increased its earnings per share by 16% per year over the past five years. The lack of cash flow, however, makes us a little cautious, especially as regards the future of the dividend.
We also draw attention to the fact that China Education Group Holdings issued shares equivalent 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 upwards. Companies that regularly issue new shares are often sub-optimal from a dividend standpoint.
Overall, it’s probably not a high-income stock, although the dividend is in the process of being increased. With no cash flow, it’s hard to see how the business can support the payment of a dividend. Overall, we don’t think this company has the makings of a good income stock.
It is important to note that companies with a consistent dividend policy will generate greater investor confidence than those with an erratic policy. Still, there are a host of other factors that investors need to consider, aside from dividend payments, when analyzing a business. For example, we have selected 2 warning signs for China Education Group Holdings that investors should consider. We have also set up a list of global stocks with a solid dividend.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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