Read This Before Considering Sinomach Precision Industry Group Co., Ltd. (SZSE:002046) For Its Upcoming CN¥0.20 Dividend

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 Sinomach Precision Industry Group Co., Ltd. (SZSE:002046) is about to go ex-dividend in just 3 days. 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase Sinomach Precision Industry Group's shares on or after the 13th of June will not receive the dividend, which will be paid on the 13th of June.

The company's upcoming dividend is CN¥0.20 a share, following on from the last 12 months, when the company distributed a total of CN¥0.20 per share to shareholders. Looking at the last 12 months of distributions, Sinomach Precision Industry Group has a trailing yield of approximately 1.8% on its current stock price of CN¥10.97. If you buy this business for its dividend, you should have an idea of whether Sinomach Precision Industry Group's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Sinomach Precision Industry Group

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. Sinomach Precision Industry Group paid out a comfortable 39% of its profit last year. A useful secondary check can be to evaluate whether Sinomach Precision Industry Group generated enough free cash flow to afford its dividend. Sinomach Precision Industry Group paid out more free cash flow than it generated - 184%, 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.

Sinomach Precision Industry Group paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Sinomach Precision Industry Group to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit Sinomach Precision Industry Group paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Sinomach Precision Industry Group has grown its earnings rapidly, up 63% a year for the past five years. Earnings have been growing quickly, 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. Sinomach Precision Industry Group has delivered 21% dividend growth per year on average over the past 10 years. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

Final Takeaway

Is Sinomach Precision Industry Group an attractive dividend stock, or better left on the shelf? We like that Sinomach Precision Industry Group has been successfully growing its earnings per share at a nice rate and reinvesting most of its profits in the business. However, we note the high cashflow payout ratio with some concern. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.

In light of that, while Sinomach Precision Industry Group has an appealing dividend, it's worth knowing the risks involved with this stock. Our analysis shows 2 warning signs for Sinomach Precision Industry Group and you should be aware of them before buying any shares.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.