Don't Buy Anhui Provincial Architectural Design and Research Institute Co.,Ltd. (SZSE:301167) For Its Next Dividend Without Doing These Checks

Anhui Provincial Architectural Design and Research Institute Co.,Ltd. (SZSE:301167) stock is about to trade ex-dividend in three days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase Anhui Provincial Architectural Design and Research InstituteLtd's shares before the 31st of May in order to be eligible for the dividend, which will be paid on the 31st of May.

The company's upcoming dividend is CN¥0.216 a share, following on from the last 12 months, when the company distributed a total of CN¥0.22 per share to shareholders. Based on the last year's worth of payments, Anhui Provincial Architectural Design and Research InstituteLtd has a trailing yield of 1.6% on the current stock price of CN¥13.39. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Anhui Provincial Architectural Design and Research InstituteLtd has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Anhui Provincial Architectural Design and Research InstituteLtd

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. Anhui Provincial Architectural Design and Research InstituteLtd is paying out an acceptable 56% of its profit, a common payout level among most companies. 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. Anhui Provincial Architectural Design and Research InstituteLtd paid out more free cash flow than it generated - 191%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Anhui Provincial Architectural Design and Research InstituteLtd does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

While Anhui Provincial Architectural Design and Research InstituteLtd's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Anhui Provincial Architectural Design and Research InstituteLtd's ability to maintain its dividend.

Click here to see how much of its profit Anhui Provincial Architectural Design and Research InstituteLtd paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Anhui Provincial Architectural Design and Research InstituteLtd's earnings per share have fallen at approximately 9.6% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Anhui Provincial Architectural Design and Research InstituteLtd has delivered 23% dividend growth per year on average over the past two years. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

The Bottom Line

Is Anhui Provincial Architectural Design and Research InstituteLtd worth buying for its dividend? Anhui Provincial Architectural Design and Research InstituteLtd had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not that we think Anhui Provincial Architectural Design and Research InstituteLtd is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering Anhui Provincial Architectural Design and Research InstituteLtd as an investment, you'll find it beneficial to know what risks this stock is facing. To that end, you should learn about the 4 warning signs we've spotted with Anhui Provincial Architectural Design and Research InstituteLtd (including 2 which are a bit unpleasant).

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.