Do These 3 Checks Before Buying Zhejiang Tengen Electrics Co.,Ltd. (SHSE:605066) For Its Upcoming Dividend

It looks like Zhejiang Tengen Electrics Co.,Ltd. (SHSE:605066) is about to go ex-dividend in the next four 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. Accordingly, Zhejiang Tengen ElectricsLtd investors that purchase the stock on or after the 24th of September will not receive the dividend, which will be paid on the 24th of September.

The company's next dividend payment will be CN¥0.10 per share, on the back of last year when the company paid a total of CN¥0.20 to shareholders. Calculating the last year's worth of payments shows that Zhejiang Tengen ElectricsLtd has a trailing yield of 3.9% on the current share price of CN¥5.18. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Zhejiang Tengen ElectricsLtd

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. Zhejiang Tengen ElectricsLtd distributed an unsustainably high 115% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether Zhejiang Tengen ElectricsLtd generated enough free cash flow to afford its dividend. Over the last year it paid out 55% of its free cash flow as dividends, within the usual range for most companies.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Zhejiang Tengen ElectricsLtd fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Zhejiang Tengen ElectricsLtd paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Zhejiang Tengen ElectricsLtd's earnings per share have fallen at approximately 5.1% a year over the previous 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. Zhejiang Tengen ElectricsLtd's dividend payments per share have declined at 5.9% 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.

The Bottom Line

Is Zhejiang Tengen ElectricsLtd worth buying for its dividend? Earnings per share have been in decline, which is not encouraging. Additionally, Zhejiang Tengen ElectricsLtd is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

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 Tengen ElectricsLtd. To that end, you should learn about the 2 warning signs we've spotted with Zhejiang Tengen ElectricsLtd (including 1 which is a bit concerning).

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.