We Wouldn't Be Too Quick To Buy Wanxiang Qianchao Co.,Ltd. (SZSE:000559) Before It Goes Ex-Dividend

Wanxiang Qianchao Co.,Ltd. (SZSE:000559) is about to trade ex-dividend in the next 3 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase Wanxiang QianchaoLtd's shares on or after the 18th of June will not receive the dividend, which will be paid on the 18th of June.

The company's upcoming dividend is CN¥0.15 a share, following on from the last 12 months, when the company distributed a total of CN¥0.15 per share to shareholders. Last year's total dividend payments show that Wanxiang QianchaoLtd has a trailing yield of 3.1% on the current share price of CN¥4.81. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Wanxiang QianchaoLtd can afford its dividend, and if the dividend could grow.

View our latest analysis for Wanxiang QianchaoLtd

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Wanxiang QianchaoLtd paid out 59% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the past year it paid out 169% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

While Wanxiang QianchaoLtd's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Wanxiang QianchaoLtd to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit Wanxiang QianchaoLtd paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That explains why we're not overly excited about Wanxiang QianchaoLtd's flat earnings over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Wanxiang QianchaoLtd has delivered 10.0% dividend growth per year on average over the past 10 years.

Final Takeaway

Is Wanxiang QianchaoLtd worth buying for its dividend? Earnings per share have not grown and Wanxiang QianchaoLtd's profit payout ratio looks reasonable. However, it paid out a disconcertingly high percentage of its cashflow, which is a worry. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that in mind though, if the poor dividend characteristics of Wanxiang QianchaoLtd don't faze you, it's worth being mindful of the risks involved with this business. For example - Wanxiang QianchaoLtd has 1 warning sign we think you should be aware of.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com