Three Days Left To Buy Anhui Quanchai Engine Co., Ltd. (SHSE:600218) Before The Ex-Dividend Date

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 Anhui Quanchai Engine Co., Ltd. (SHSE:600218) is about to go ex-dividend in just three 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Meaning, you will need to purchase Anhui Quanchai Engine's shares before the 24th of June to receive the dividend, which will be paid on the 24th of June.

The company's next dividend payment will be CN¥0.07 per share, on the back of last year when the company paid a total of CN¥0.07 to shareholders. Based on the last year's worth of payments, Anhui Quanchai Engine has a trailing yield of 1.0% on the current stock price of CN¥6.83. If you buy this business for its dividend, you should have an idea of whether Anhui Quanchai Engine's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Anhui Quanchai Engine

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Anhui Quanchai Engine paid out a comfortable 33% of its profit last year. 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 114% 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.

Anhui Quanchai Engine does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

Anhui Quanchai Engine paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Anhui Quanchai Engine's ability to maintain its dividend.

Click here to see how much of its profit Anhui Quanchai Engine paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. For this reason, we're glad to see Anhui Quanchai Engine's earnings per share have risen 14% per annum over the last five years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Anhui Quanchai Engine has seen its dividend decline 3.9% per annum on average over the past nine years, which is not great to see. Anhui Quanchai Engine is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

To Sum It Up

Is Anhui Quanchai Engine worth buying for its dividend? We're glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it's not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. All things considered, we are not particularly enthused about Anhui Quanchai Engine from a dividend perspective.

While it's tempting to invest in Anhui Quanchai Engine for the dividends alone, you should always be mindful of the risks involved. Our analysis shows 2 warning signs for Anhui Quanchai Engine and you should be aware of them before buying any shares.

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.

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