EC Healthcare (HKG: 2138) dividend is reduced from last year’s payout covering the same period at HK$0.042 on September 20. This means that the annual payout is 2.0% of the current share price, which is less than what the rest of the industry pays.

Check out our latest analysis for EC Healthcare

EC Healthcare revenues easily cover distributions

It would be nice if the yield was higher, but we should also check whether higher levels of dividend payments would be sustainable. Prior to this announcement, EC Healthcare’s dividend was a fairly large proportion of earnings, but only free cash flow. In general, cash flow is more important than earnings, so we are confident that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

According to analysts, EPS should be several times higher next year. Assuming the dividend continues to follow recent trends, we estimate the payout ratio could reach 30%, which is in a comfortable range for us.

EC Healthcare’s dividend lacks consistency

EC Healthcare has been paying dividends for some time, but the track record is not stellar. This suggests that the dividend may not be the most reliable. The annual payout for the past 6 years was HK$0.0191 in 2016, and the most recent year’s payout was HK$0.144. This implies that the company has increased its distributions at an annual rate of approximately 40% over this period. It’s great to see strong growth in dividend payouts, but cuts are concerning as it may indicate that the payout policy is too ambitious.

Dividend growth prospects are limited

Earnings per share growth could be a mitigating factor given past dividend fluctuations. It’s not great to see that EC Healthcare’s earnings per share have fallen about 4.2% per year over the past five years. If earnings continue to decline, the company may have to make the difficult choice of cutting the dividend or even stopping it altogether – the opposite of dividend growth. It’s not all bad news though, as earnings are expected to rise over the next 12 months – we’d just be a bit cautious until this can turn into a longer-term trend.

Our thoughts on the EC Healthcare dividend

Overall, the dividend seems to have been a bit high, which is why it has now been reduced. The company generates a lot of cash, which could sustain the dividend for a while, but the balance sheet isn’t great. This company is not in the high end of income providing stocks.

Companies with a stable dividend policy are likely to enjoy greater investor interest than those that suffer from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, these are not the only factors our readers should be aware of when evaluating a company. Without at least some growth in earnings per share over time, the dividend will eventually come under pressure from competition or inflation. However, very few companies see their earnings decline consistently year over year in perpetuity, so it might be interesting to see what the 7 analysts we track predict for the future. Looking for more high yield dividend ideas? Try our collection of strong dividend payers.

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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.