Here's Why We're Wary Of Buying Zhejiang Liming Intelligent ManufacturingLtd's (SHSE:603048) For Its Upcoming Dividend
Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Zhejiang Liming Intelligent Manufacturing Co.,Ltd. (SHSE:603048) is about to go ex-dividend in just two days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase Zhejiang Liming Intelligent ManufacturingLtd's shares before the 31st of October to receive the dividend, which will be paid on the 31st of October.
The company's next dividend payment will be CN¥0.07 per share. Last year, in total, the company distributed CN¥0.35 to shareholders. Based on the last year's worth of payments, Zhejiang Liming Intelligent ManufacturingLtd stock has a trailing yield of around 2.4% on the current share price of CN¥14.29. If you buy this business for its dividend, you should have an idea of whether Zhejiang Liming Intelligent ManufacturingLtd's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
See our latest analysis for Zhejiang Liming Intelligent ManufacturingLtd
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Last year Zhejiang Liming Intelligent ManufacturingLtd paid out 106% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether Zhejiang Liming Intelligent ManufacturingLtd generated enough free cash flow to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 4.3% of its cash flow last year.
It's good to see that while Zhejiang Liming Intelligent ManufacturingLtd's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by Zhejiang Liming Intelligent ManufacturingLtd's 18% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, two years ago, Zhejiang Liming Intelligent ManufacturingLtd has lifted its dividend by approximately 31% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Zhejiang Liming Intelligent ManufacturingLtd is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
The Bottom Line
Should investors buy Zhejiang Liming Intelligent ManufacturingLtd for the upcoming dividend? It's not a great combination to see a company with earnings in decline and paying out 106% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Zhejiang Liming Intelligent ManufacturingLtd's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Zhejiang Liming Intelligent ManufacturingLtd.
Although, if you're still interested in Zhejiang Liming Intelligent ManufacturingLtd and want to know more, you'll find it very useful to know what risks this stock faces. Be aware that Zhejiang Liming Intelligent ManufacturingLtd is showing 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.