Don't Race Out To Buy Shenzhen Ridge Engineering Consulting Co., Ltd. (SZSE:300977) Just Because It's Going Ex-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 Shenzhen Ridge Engineering Consulting Co., Ltd. (SZSE:300977) is about to go ex-dividend in just two days. 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 important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase Shenzhen Ridge Engineering Consulting's shares before the 30th of May to receive the dividend, which will be paid on the 30th of May.

The company's next dividend payment will be CN¥0.22 per share. Last year, in total, the company distributed CN¥0.22 to shareholders. Looking at the last 12 months of distributions, Shenzhen Ridge Engineering Consulting has a trailing yield of approximately 1.4% on its current stock price of CN¥15.65. If you buy this business for its dividend, you should have an idea of whether Shenzhen Ridge Engineering Consulting's dividend is reliable and sustainable. So we need to investigate whether Shenzhen Ridge Engineering Consulting can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Shenzhen Ridge Engineering Consulting

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. Last year Shenzhen Ridge Engineering Consulting paid out 93% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether Shenzhen Ridge Engineering Consulting generated enough free cash flow to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 12% of its cash flow last year.

It's good to see that while Shenzhen Ridge Engineering Consulting's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

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. Shenzhen Ridge Engineering Consulting's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 39% a year over the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Shenzhen Ridge Engineering Consulting'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

Should investors buy Shenzhen Ridge Engineering Consulting for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 93% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Shenzhen Ridge Engineering Consulting's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Although, if you're still interested in Shenzhen Ridge Engineering Consulting and want to know more, you'll find it very useful to know what risks this stock faces. Our analysis shows 2 warning signs for Shenzhen Ridge Engineering Consulting 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.