It Might Not Be A Great Idea To Buy Hangzhou Guotai Environmental Protection Technology Co.,Ltd. (SZSE:301203) For Its Next 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 Guotai Environmental Protection Technology Co.,Ltd. (SZSE:301203) is about to go ex-dividend in just 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. 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. Accordingly, Hangzhou Guotai Environmental Protection TechnologyLtd investors that purchase the stock on or after the 24th of January will not receive the dividend, which will be paid on the 24th of January.

The company's next dividend payment will be CN¥0.80 per share, and in the last 12 months, the company paid a total of CN¥1.60 per share. Based on the last year's worth of payments, Hangzhou Guotai Environmental Protection TechnologyLtd stock has a trailing yield of around 4.7% on the current share price of CN¥33.69. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Hangzhou Guotai Environmental Protection TechnologyLtd

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. Hangzhou Guotai Environmental Protection TechnologyLtd distributed an unsustainably high 144% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether Hangzhou Guotai Environmental Protection TechnologyLtd generated enough free cash flow to afford its dividend. Over the past year it paid out 154% of its free cash flow as dividends, which is uncomfortably 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.

Hangzhou Guotai Environmental Protection TechnologyLtd 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.

Cash is slightly more important than profit from a dividend perspective, but given Hangzhou Guotai Environmental Protection TechnologyLtd's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

Click here to see how much of its profit Hangzhou Guotai Environmental Protection TechnologyLtd paid out over the last 12 months.

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. For this reason, we're glad to see Hangzhou Guotai Environmental Protection TechnologyLtd's earnings per share have risen 16% per annum over the last five years. It's great to see earnings per share growing rapidly, but we're disturbed to see the company paid out 144% of its earnings last year. Unless there are extenuating circumstances, we feel this is a clear concern around the sustainability of the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last two years, Hangzhou Guotai Environmental Protection TechnologyLtd has lifted its dividend by approximately 3.3% a year on average. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.

To Sum It Up

Has Hangzhou Guotai Environmental Protection TechnologyLtd got what it takes to maintain its dividend payments? While it's nice to see earnings per share growing, we're curious about how Hangzhou Guotai Environmental Protection TechnologyLtd intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

So if you're still interested in Hangzhou Guotai Environmental Protection TechnologyLtd despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example - Hangzhou Guotai Environmental Protection TechnologyLtd has 2 warning signs we think you should be aware of.

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.