Interested In Shanghai Tunnel Engineering's (SHSE:600820) Upcoming CN¥0.23 Dividend? You Have Three Days Left

Readers hoping to buy Shanghai Tunnel Engineering Co., Ltd. (SHSE:600820) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order 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. Therefore, if you purchase Shanghai Tunnel Engineering's shares on or after the 16th of August, you won't be eligible to receive the dividend, when it is paid on the 16th of August.

The company's next dividend payment will be CN¥0.23 per share, on the back of last year when the company paid a total of CN¥0.46 to shareholders. Looking at the last 12 months of distributions, Shanghai Tunnel Engineering has a trailing yield of approximately 6.5% on its current stock price of CN¥7.05. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Shanghai Tunnel Engineering

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. That's why it's good to see Shanghai Tunnel Engineering paying out a modest 36% of its earnings. 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. It paid out an unsustainably high 330% of its free cash flow as dividends over the past 12 months, which is worrying. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.

While Shanghai Tunnel Engineering'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 Shanghai Tunnel Engineering to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Shanghai Tunnel Engineering, with earnings per share up 8.3% on average over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Shanghai Tunnel Engineering also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. It's hard to grow dividends per share when a company keeps creating new shares.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Shanghai Tunnel Engineering has delivered an average of 12% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Should investors buy Shanghai Tunnel Engineering for the upcoming dividend? Shanghai Tunnel Engineering has seen its earnings per share grow steadily and paid out less than half its profit over the last year. Unfortunately, its dividend was not well covered by free cash flow. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.

However if you're still interested in Shanghai Tunnel Engineering as a potential investment, you should definitely consider some of the risks involved with Shanghai Tunnel Engineering. Be aware that Shanghai Tunnel Engineering is showing 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

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.