Why It Might Not Make Sense To Buy Dalian Demaishi Precision Technology Co., Ltd. (SZSE:301007) For Its Upcoming Dividend

Dalian Demaishi Precision Technology Co., Ltd. (SZSE:301007) stock is about to trade ex-dividend in three 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 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. In other words, investors can purchase Dalian Demaishi Precision Technology's shares before the 30th of May in order to be eligible for the dividend, which will be paid on the 30th of May.

The company's next dividend payment will be CN¥0.15 per share. Last year, in total, the company distributed CN¥0.15 to shareholders. Based on the last year's worth of payments, Dalian Demaishi Precision Technology has a trailing yield of 1.2% on the current stock price of CN¥12.52. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Dalian Demaishi Precision Technology

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. That's why it's good to see Dalian Demaishi Precision Technology paying out a modest 39% of its earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year, it paid out dividends equivalent to 204% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how Dalian Demaishi Precision Technology intends to continue funding this dividend, or if it could be forced to cut the payment.

While Dalian Demaishi Precision Technology'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 Dalian Demaishi Precision Technology 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 Dalian Demaishi Precision Technology paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. So we're not too excited that Dalian Demaishi Precision Technology's earnings are down 4.9% a year over the past five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Dalian Demaishi Precision Technology has delivered an average of 22% per year annual increase in its dividend, based on the past two years of dividend payments.

Final Takeaway

Should investors buy Dalian Demaishi Precision Technology for the upcoming dividend? Dalian Demaishi Precision Technology's earnings per share have fallen noticeably and, although it paid out less than half its profit as dividends last year, it paid out a disconcertingly high percentage of its cashflow, which is not a great combination. 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 Dalian Demaishi Precision Technology don't faze you, it's worth being mindful of the risks involved with this business. For example, we've found 2 warning signs for Dalian Demaishi Precision Technology that we recommend you consider before investing in the business.

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.