Don't Race Out To Buy Xianheng International Science&Technology Co., Ltd. (SHSE:605056) Just Because It's Going Ex-Dividend

It looks like Xianheng International Science&Technology Co., Ltd. (SHSE:605056) is about to go ex-dividend in the next two days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. In other words, investors can purchase Xianheng International Science&Technology's shares before the 14th of June in order to be eligible for the dividend, which will be paid on the 14th of June.

The company's next dividend payment will be CN¥0.15 per share, on the back of last year when the company paid a total of CN¥0.15 to shareholders. Calculating the last year's worth of payments shows that Xianheng International Science&Technology has a trailing yield of 1.2% on the current share price of CN¥12.23. If you buy this business for its dividend, you should have an idea of whether Xianheng International Science&Technology's dividend is reliable and sustainable. So we need to investigate whether Xianheng International Science&Technology can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Xianheng International Science&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. Xianheng International Science&Technology paid out more than half (66%) of its earnings last year, which is a regular payout ratio for most companies. 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 past year it paid out 128% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Xianheng International Science&Technology 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.

While Xianheng International Science&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. Were this to happen repeatedly, this would be a risk to Xianheng International Science&Technology's ability to maintain its dividend.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Xianheng International Science&Technology's earnings per share have fallen at approximately 13% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Xianheng International Science&Technology's dividend payments per share have declined at 43% per year on average over the past three years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

To Sum It Up

Is Xianheng International Science&Technology an attractive dividend stock, or better left on the shelf? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. It's not that we think Xianheng International Science&Technology is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in Xianheng International Science&Technology despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For instance, we've identified 5 warning signs for Xianheng International Science&Technology (1 is a bit concerning) you should be aware of.

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.