Why It Might Not Make Sense To Buy Zhuhai CosMX Battery Co., Ltd. (SHSE:688772) For Its Upcoming Dividend

Readers hoping to buy Zhuhai CosMX Battery Co., Ltd. (SHSE:688772) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase Zhuhai CosMX Battery's shares before the 29th of July in order to be eligible for the dividend, which will be paid on the 29th of July.

The company's next dividend payment will be CN¥0.27 per share, on the back of last year when the company paid a total of CN¥0.27 to shareholders. Looking at the last 12 months of distributions, Zhuhai CosMX Battery has a trailing yield of approximately 1.8% on its current stock price of CN¥15.01. 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 Zhuhai CosMX Battery has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Zhuhai CosMX Battery

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Zhuhai CosMX Battery paid out more than half (58%) of its earnings last year, which is a regular payout ratio for most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Zhuhai CosMX Battery paid out more free cash flow than it generated - 161%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

While Zhuhai CosMX Battery'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 Zhuhai CosMX Battery 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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at Zhuhai CosMX Battery, with earnings per share up 7.9% 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.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Zhuhai CosMX Battery has delivered 22% dividend growth per year on average over the past two years. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

To Sum It Up

Has Zhuhai CosMX Battery got what it takes to maintain its dividend payments? Zhuhai CosMX Battery is paying out a reasonable percentage of its income and an uncomfortably high 161% of its cash flow as dividends. At least earnings per share have been growing steadily. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that in mind though, if the poor dividend characteristics of Zhuhai CosMX Battery don't faze you, it's worth being mindful of the risks involved with this business. Our analysis shows 2 warning signs for Zhuhai CosMX Battery and you should be aware of these 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