Do These 3 Checks Before Buying Suzhou Future Electrical Co., Ltd. (SZSE:301386) For Its Upcoming Dividend

It looks like Suzhou Future Electrical Co., Ltd. (SZSE:301386) is about to go ex-dividend in the next 3 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. In other words, investors can purchase Suzhou Future Electrical's shares before the 27th of May in order to be eligible for the dividend, which will be paid on the 27th of May.

The company's next dividend payment will be CN¥0.80 per share, on the back of last year when the company paid a total of CN¥1.60 to shareholders. Based on the last year's worth of payments, Suzhou Future Electrical stock has a trailing yield of around 6.9% on the current share price of CN¥23.04. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Suzhou Future Electrical

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Suzhou Future Electrical distributed an unsustainably high 174% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether Suzhou Future Electrical generated enough free cash flow to afford its dividend. Over the last year, it paid out more than three-quarters (83%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's good to see that while Suzhou Future Electrical's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Suzhou Future Electrical 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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Suzhou Future Electrical earnings per share are up 4.4% per annum over the last five years.

Given that Suzhou Future Electrical has only been paying a dividend for a year, there's not much of a past history to draw insight from.

To Sum It Up

Should investors buy Suzhou Future Electrical for the upcoming dividend? Earnings per share have not grown all that much, and the company is paying out an uncomfortably high percentage of its income. Fortunately it paid out a lower percentage of its 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.

With that in mind though, if the poor dividend characteristics of Suzhou Future Electrical don't faze you, it's worth being mindful of the risks involved with this business. For example, we've found 1 warning sign for Suzhou Future Electrical 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.