It Might Not Be A Great Idea To Buy Shenzhen Cheng Chung Design Co., Ltd. (SZSE:002811) For Its Next Dividend

Readers hoping to buy Shenzhen Cheng Chung Design Co., Ltd. (SZSE:002811) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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. Therefore, if you purchase Shenzhen Cheng Chung Design's shares on or after the 29th of May, you won't be eligible to receive the dividend, when it is paid on the 29th of May.

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. Based on the last year's worth of payments, Shenzhen Cheng Chung Design has a trailing yield of 2.8% on the current stock price of CN¥7.10. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Shenzhen Cheng Chung Design can afford its dividend, and if the dividend could grow.

See our latest analysis for Shenzhen Cheng Chung Design

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. Shenzhen Cheng Chung Design paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. The good news is it paid out just 2.3% of its free cash flow in the last year.

Click here to see how much of its profit Shenzhen Cheng Chung Design paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Shenzhen Cheng Chung Design was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Shenzhen Cheng Chung Design has delivered an average of 6.0% per year annual increase in its dividend, based on the past seven years of dividend payments.

Remember, you can always get a snapshot of Shenzhen Cheng Chung Design's financial health, by checking our visualisation of its financial health, here.

Final Takeaway

Has Shenzhen Cheng Chung Design got what it takes to maintain its dividend payments? First, it's not great to see the company paying a dividend despite being loss-making over the last year. On the plus side, the dividend was covered by free cash flow." It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

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 Shenzhen Cheng Chung Design. For instance, we've identified 3 warning signs for Shenzhen Cheng Chung Design (1 doesn't sit too well with us) 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.