Why It Might Not Make Sense To Buy Hangzhou Landscape Architecture Design Institute Co., Ltd. (SZSE:300649) For Its Upcoming 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 Hangzhou Landscape Architecture Design Institute Co., Ltd. (SZSE:300649) is about to go ex-dividend in just four 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. This means that investors who purchase Hangzhou Landscape Architecture Design Institute's shares on or after the 5th of June will not receive the dividend, which will be paid on the 5th of June.

The company's next dividend payment will be CN¥0.06 per share, and in the last 12 months, the company paid a total of CN¥0.06 per share. Looking at the last 12 months of distributions, Hangzhou Landscape Architecture Design Institute has a trailing yield of approximately 0.5% on its current stock price of CN¥11.53. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Hangzhou Landscape Architecture Design Institute

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 Landscape Architecture Design Institute distributed an unsustainably high 116% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Dividends consumed 60% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Hangzhou Landscape Architecture Design Institute fortunately did generate enough cash to fund its dividend. 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 Hangzhou Landscape Architecture Design Institute 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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Hangzhou Landscape Architecture Design Institute's earnings per share have plummeted approximately 34% a year over the previous five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. It looks like the Hangzhou Landscape Architecture Design Institute dividends are largely the same as they were seven years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.

The Bottom Line

Is Hangzhou Landscape Architecture Design Institute worth buying for its dividend? Earnings per share have been shrinking in recent times. Additionally, Hangzhou Landscape Architecture Design Institute is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. It's not that we think Hangzhou Landscape Architecture Design Institute is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

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 Hangzhou Landscape Architecture Design Institute. For example, Hangzhou Landscape Architecture Design Institute has 3 warning signs (and 2 which are potentially serious) we think you should know about.

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.