Li Ning Company's Dividend Risk and Investment Implications: Assessing Sustainability Amid High Yield and Financial Volatility

Li Ning Company Limited (SEHK:2331) has long attracted income-focused investors with its attractive dividend yields. However, a closer examination of its financial metrics reveals a nuanced picture of sustainability risks. While the company’s 2024 annual dividend payout ratio of 50% [1] appears manageable, the quarterly payout ratio of 76% in Q4 2024 [3] raises red flags. This discrepancy underscores the volatility inherent in its dividend policy, particularly when juxtaposed with declining profit margins and uneven earnings growth.

The company’s liquidity position remains robust, with RMB2.411 billion in net operating cash inflow in Q2 2025 [1] and RMB3.76 billion in free cash flow as of Q4 2024 [3]. Total cash and short-term investments of ¥15.76 billion [3] further reinforce its ability to weather short-term shocks. Yet, these figures must be contextualized against a backdrop of margin compression. Li Ning’s operating profit margin dipped to 12.8% in 2024 from 12.9% in 2023 [1], while its net profit margin fell to 9.6% from 10.8% [4]. Such trends suggest that while revenue growth (up 3.9% year-on-year in 2024 [1]) is stable, profitability is under pressure—a critical factor for sustaining high payout ratios.

The risk intensifies when considering the company’s payout trajectory. A 50% annual payout ratio [1] climbed to 76% in a single quarter [3], reflecting a lopsided distribution of earnings. This volatility could strain the business if earnings dip due to macroeconomic headwinds or supply chain disruptions. For context, Li Ning’s return on equity of 10.3% in 2024 [4] lags behind industry benchmarks, indicating that capital efficiency is not a differentiator. Investors must weigh whether the company can reverse margin declines or face a scenario where dividend payouts outpace earnings growth.

From an investment perspective, Li Ning’s dividend strategy appears to prioritize shareholder returns over reinvestment. While its cash reserves provide a buffer, the reliance on high payout ratios—especially in a sector prone to cyclical demand—poses long-term risks. A prudent approach would involve monitoring quarterly earnings stability and margin trends. If Li Ning can stabilize its gross profit margin (which rose to 49.4% in 2024 [1]) and maintain free cash flow above RMB3 billion, the dividend remains defensible. However, any further erosion of margins or a slowdown in revenue growth could force a payout reduction.

In conclusion, Li Ning’s dividend yield is enticing, but its sustainability hinges on the company’s ability to balance shareholder returns with operational resilience. Investors should prioritize transparency in quarterly earnings reports and assess whether management can navigate margin pressures without compromising dividend commitments.

Source:
[1] Li Ning Company Limited Announces 2024 Annual Results [https://laotiantimes.com/2025/03/28/li-ning-company-limited-announces-2024-annual-results/]
[2] Li Ning Company (LNNGF) Balance Sheet [https://www.tipranks.com/stocks/lnngf/financials/balance-sheet]
[3] Li Ning Co (HKSE:02331) Dividend Payout Ratio [https://www.gurufocus.com/term/payout/HKSE:02331]
[4] Li Ning (SEHK:2331) - Earnings & Revenue Performance [https://simplywall.st/stocks/hk/consumer-durables/hkg-2331/li-ning-shares/past]