We Wouldn't Be Too Quick To Buy Zhejiang Sanfer Electric Co., Ltd (SHSE:605336) Before It Goes Ex-Dividend

Zhejiang Sanfer Electric Co., Ltd (SHSE:605336) stock is about to trade ex-dividend in three 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Thus, you can purchase Zhejiang Sanfer Electric's shares before the 16th of July in order to receive the dividend, which the company will pay on the 16th of July.

The company's upcoming dividend is CN¥0.62 a share, following on from the last 12 months, when the company distributed a total of CN¥0.62 per share to shareholders. Based on the last year's worth of payments, Zhejiang Sanfer Electric has a trailing yield of 5.4% on the current stock price of CN¥11.55. 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! We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Zhejiang Sanfer Electric

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. Zhejiang Sanfer Electric paid out 67% of its earnings to investors last year, a normal payout level for most businesses. 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. The company paid out 97% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

Zhejiang Sanfer Electric 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 Zhejiang Sanfer Electric's ability to maintain its dividend.

Click here to see how much of its profit Zhejiang Sanfer Electric 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. If earnings fall far enough, the company could be forced to cut its dividend. So we're not too excited that Zhejiang Sanfer Electric's earnings are down 4.0% 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. In the last three years, Zhejiang Sanfer Electric has lifted its dividend by approximately 25% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.

The Bottom Line

Has Zhejiang Sanfer Electric got what it takes to maintain its dividend payments? 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. Bottom line: Zhejiang Sanfer Electric has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering Zhejiang Sanfer Electric as an investment, you'll find it beneficial to know what risks this stock is facing. Case in point: We've spotted 1 warning sign for Zhejiang Sanfer Electric you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com