Do These 3 Checks Before Buying Bros Eastern.,Ltd (SHSE:601339) For Its Upcoming Dividend

It looks like Bros Eastern.,Ltd (SHSE:601339) is about to go ex-dividend in the next two days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order 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. This means that investors who purchase Bros Eastern.Ltd'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¥0.30 per share, and in the last 12 months, the company paid a total of CN¥0.30 per share. Last year's total dividend payments show that Bros Eastern.Ltd has a trailing yield of 5.4% on the current share price of CN¥5.59. 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 Bros Eastern.Ltd

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. Bros Eastern.Ltd paid out 92% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. A useful secondary check can be to evaluate whether Bros Eastern.Ltd generated enough free cash flow to afford its dividend. It paid out 95% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

As Bros Eastern.Ltd's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Bros Eastern.Ltd, with earnings per share up 3.1% on average over the last five years. Minimal earnings growth, combined with concerningly high payout ratios suggests that Bros Eastern.Ltd is unlikely to grow the dividend much in future, and indeed the payment could be vulnerable to a cut.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Bros Eastern.Ltd has lifted its dividend by approximately 11% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

The Bottom Line

Is Bros Eastern.Ltd an attractive dividend stock, or better left on the shelf? Bros Eastern.Ltd is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, although at least earnings per share are growing somewhat. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that in mind though, if the poor dividend characteristics of Bros Eastern.Ltd don't faze you, it's worth being mindful of the risks involved with this business. Our analysis shows 3 warning signs for Bros Eastern.Ltd and you should be aware of these before buying any shares.

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.