Don't Race Out To Buy Dongguan Huali Industries Co.,Ltd (SHSE:603038) Just Because It's Going Ex-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 Dongguan Huali Industries Co.,Ltd (SHSE:603038) is about to go ex-dividend in just 2 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the 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. This means that investors who purchase Dongguan Huali IndustriesLtd's shares on or after the 6th of June will not receive the dividend, which will be paid on the 6th of June.

The company's next dividend payment will be CN¥0.05 per share. Last year, in total, the company distributed CN¥0.05 to shareholders. Based on the last year's worth of payments, Dongguan Huali IndustriesLtd has a trailing yield of 0.5% on the current stock price of CN¥10.10. 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 Dongguan Huali IndustriesLtd has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Dongguan Huali IndustriesLtd

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. It paid out 84% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Dongguan Huali IndustriesLtd paid out more free cash flow than it generated - 111%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Dongguan Huali IndustriesLtd paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Dongguan Huali IndustriesLtd's ability to maintain its dividend.

Click here to see how much of its profit Dongguan Huali IndustriesLtd 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. Dongguan Huali IndustriesLtd's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 32% a year over the past five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Dongguan Huali IndustriesLtd's dividend payments per share have declined at 16% per year on average over the past seven years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

The Bottom Line

Should investors buy Dongguan Huali IndustriesLtd for the upcoming dividend? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Dongguan Huali IndustriesLtd.

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 Dongguan Huali IndustriesLtd. Every company has risks, and we've spotted 3 warning signs for Dongguan Huali IndustriesLtd (of which 1 shouldn't be ignored!) you should know about.

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.