Key Things To Watch Out For If You Are After Luzhou Bank Co., Ltd.'s (HKG:1983) 6.4% Dividend

Today we'll take a closer look at Luzhou Bank Co., Ltd. (HKG:1983) 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 popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

Luzhou Bank has only been paying a dividend for a year or so, so investors might be curious about its 6.4% yield. Some simple analysis can reduce the risk of holding Luzhou Bank for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Luzhou Bank!

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, Luzhou Bank paid out 38% 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. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.

Remember, you can always get a snapshot of Luzhou Bank's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. 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. The dividend has shrunk at a rate of less than 1% a year over this period.

We struggle to make a case for buying Luzhou Bank for its dividend, given that payments have shrunk over the past one years.

Dividend Growth Potential

Examining whether the dividend is affordable and stable is important. However, it's also important to assess if earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient's purchasing power. In the last five years, Luzhou Bank's earnings per share have shrunk at approximately 9.1% per annum. 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.

We'd also point out that Luzhou Bank issued a meaningful number of new shares in the past year. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We're glad to see Luzhou Bank has a low payout ratio, as this suggests earnings are being reinvested in the business. Earnings per share are down, and to our mind Luzhou Bank has not been paying a dividend long enough to demonstrate its resilience across economic cycles. Luzhou Bank might not be a bad business, but it doesn't show all of the characteristics we look for in a dividend stock.

You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Luzhou Bank stock.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.