Don't Buy FULONGMA GROUP Co.,Ltd. (SHSE:603686) For Its Next Dividend Without Doing These Checks

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 FULONGMA GROUP Co.,Ltd. (SHSE:603686) is about to go ex-dividend in just 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. Accordingly, FULONGMA GROUPLtd investors that purchase the stock on or after the 21st of June will not receive the dividend, which will be paid on the 21st of June.

The company's next dividend payment will be CN¥0.25 per share, and in the last 12 months, the company paid a total of CN¥0.25 per share. Looking at the last 12 months of distributions, FULONGMA GROUPLtd has a trailing yield of approximately 3.1% on its current stock price of CN¥8.07. 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! So we need to investigate whether FULONGMA GROUPLtd can afford its dividend, and if the dividend could grow.

View our latest analysis for FULONGMA GROUPLtd

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. Fortunately FULONGMA GROUPLtd's payout ratio is modest, at just 47% of profit. 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. The company paid out 110% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

FULONGMA GROUPLtd 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 FULONGMA GROUPLtd's ability to maintain its dividend.

Click here to see how much of its profit FULONGMA GROUPLtd 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. It's not encouraging to see that FULONGMA GROUPLtd's earnings are effectively flat 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.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. FULONGMA GROUPLtd has delivered an average of 8.0% per year annual increase in its dividend, based on the past nine years of dividend payments.

To Sum It Up

Is FULONGMA GROUPLtd worth buying for its dividend? It's disappointing to see earnings per share have fallen slightly, even though FULONGMA GROUPLtd is paying out less than half its income as dividends. It's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of FULONGMA GROUPLtd.

With that being said, if you're still considering FULONGMA GROUPLtd as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 1 warning sign for FULONGMA GROUPLtd and you should be aware of this 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