Here's Why We're Wary Of Buying Zhejiang Yankon Group's (SHSE:600261) For Its Upcoming Dividend

Zhejiang Yankon Group Co., Ltd. (SHSE:600261) is about to trade ex-dividend in the next 3 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the 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 Zhejiang Yankon Group's shares on or after the 13th of June will not receive the dividend, which will be paid on the 13th of June.

The company's upcoming dividend is CN¥0.13 a share, following on from the last 12 months, when the company distributed a total of CN¥0.13 per share to shareholders. Looking at the last 12 months of distributions, Zhejiang Yankon Group has a trailing yield of approximately 4.4% on its current stock price of CN¥2.98. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Zhejiang Yankon Group has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Zhejiang Yankon Group

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. Its dividend payout ratio is 81% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. It could become a concern if earnings started to decline. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the last year it paid out 51% of its free cash flow as dividends, within the usual range for most companies.

It's positive to see that Zhejiang Yankon Group's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see how much of its profit Zhejiang Yankon Group 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. Readers will understand then, why we're concerned to see Zhejiang Yankon Group's earnings per share have dropped 9.7% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Zhejiang Yankon Group has increased its dividend at approximately 6.9% 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 Yankon Group is already paying out 81% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Should investors buy Zhejiang Yankon Group for the upcoming dividend? While earnings per share are shrinking, it's encouraging to see that at least Zhejiang Yankon Group's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. It's not that we think Zhejiang Yankon Group is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Zhejiang Yankon Group. Be aware that Zhejiang Yankon Group is showing 2 warning signs in our investment analysis, and 1 of those is potentially serious...

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.