Should You Buy Chengdu RML Technology Co., Ltd. (SZSE:301050) For Its Upcoming Dividend?

Chengdu RML Technology Co., Ltd. (SZSE:301050) stock is about to trade ex-dividend in two days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. 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. Therefore, if you purchase Chengdu RML Technology'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 next dividend payment will be CN¥0.408 per share, on the back of last year when the company paid a total of CN¥0.41 to shareholders. Based on the last year's worth of payments, Chengdu RML Technology stock has a trailing yield of around 0.8% on the current share price of CN¥48.10. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Chengdu RML Technology

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. Chengdu RML Technology is paying out just 23% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. 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. Luckily it paid out just 3.2% of its free cash flow last year.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. For this reason, we're glad to see Chengdu RML Technology's earnings per share have risen 15% per annum over the last five years. Earnings per share are growing rapidly and the company is keeping more than half of its earnings within the business; an attractive combination which could suggest the company is focused on reinvesting to grow earnings further. This will make it easier to fund future growth efforts and we think this is an attractive combination - plus the dividend can always be increased later.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, two years ago, Chengdu RML Technology has lifted its dividend by approximately 95% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

The Bottom Line

Is Chengdu RML Technology an attractive dividend stock, or better left on the shelf? Chengdu RML Technology has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. There's a lot to like about Chengdu RML Technology, and we would prioritise taking a closer look at it.

While it's tempting to invest in Chengdu RML Technology for the dividends alone, you should always be mindful of the risks involved. For example - Chengdu RML Technology has 1 warning sign we think 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.