It Might Not Be A Great Idea To Buy Hangzhou Weiguang Electronic Co.,Ltd. (SZSE:002801) For Its Next Dividend

Hangzhou Weiguang Electronic Co.,Ltd. (SZSE:002801) stock is about to trade ex-dividend in three days. 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase Hangzhou Weiguang ElectronicLtd's shares before the 13th of June in order to receive the dividend, which the company will pay on the 13th of June.

The company's upcoming dividend is CN¥0.30 a share, following on from the last 12 months, when the company distributed a total of CN¥0.30 per share to shareholders. Based on the last year's worth of payments, Hangzhou Weiguang ElectronicLtd has a trailing yield of 1.5% on the current stock price of CN¥20.53. If you buy this business for its dividend, you should have an idea of whether Hangzhou Weiguang ElectronicLtd's dividend is reliable and sustainable. As a result, readers should always check whether Hangzhou Weiguang ElectronicLtd has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Hangzhou Weiguang ElectronicLtd

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. Hangzhou Weiguang ElectronicLtd is paying out an acceptable 58% of its profit, a common payout level among 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. Over the last year, it paid out dividends equivalent to 204% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how Hangzhou Weiguang ElectronicLtd intends to continue funding this dividend, or if it could be forced to cut the payment.

Hangzhou Weiguang ElectronicLtd 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.

Hangzhou Weiguang ElectronicLtd 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 Hangzhou Weiguang ElectronicLtd 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 Hangzhou Weiguang ElectronicLtd paid out over the last 12 months.

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. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Hangzhou Weiguang ElectronicLtd, with earnings per share up 4.0% on average over the last five years. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past eight years, Hangzhou Weiguang ElectronicLtd has increased its dividend at approximately 14% a year on average. 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

Should investors buy Hangzhou Weiguang ElectronicLtd for the upcoming dividend? Hangzhou Weiguang ElectronicLtd is paying out a reasonable percentage of its income and an uncomfortably high 204% of its cash flow as dividends. At least earnings per share have been growing steadily. It's not that we think Hangzhou Weiguang ElectronicLtd is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering Hangzhou Weiguang ElectronicLtd as an investment, you'll find it beneficial to know what risks this stock is facing. For example, we've found 3 warning signs for Hangzhou Weiguang ElectronicLtd that we recommend you consider before investing in the business.

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.