Don't Race Out To Buy Ningbo Dechang Electrical Machinery Made Co., Ltd. (SHSE:605555) Just Because It's Going Ex-Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Ningbo Dechang Electrical Machinery Made Co., Ltd. (SHSE:605555) is about to trade ex-dividend in the next 3 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible 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. Accordingly, Ningbo Dechang Electrical Machinery Made investors that purchase the stock 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¥0.35 per share. Last year, in total, the company distributed CN¥0.35 to shareholders. Calculating the last year's worth of payments shows that Ningbo Dechang Electrical Machinery Made has a trailing yield of 1.7% on the current share price of CN¥20.97. If you buy this business for its dividend, you should have an idea of whether Ningbo Dechang Electrical Machinery Made's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Ningbo Dechang Electrical Machinery Made

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately Ningbo Dechang Electrical Machinery Made's payout ratio is modest, at just 35% of profit. 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. The company paid out 96% of its free cash flow over the last year, which we think is outside the ideal range 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.

While Ningbo Dechang Electrical Machinery Made'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 Ningbo Dechang Electrical Machinery Made's ability to maintain its dividend.

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

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. So we're not too excited that Ningbo Dechang Electrical Machinery Made's earnings are down 3.9% 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. Ningbo Dechang Electrical Machinery Made has delivered 40% dividend growth per year on average over the past two years.

The Bottom Line

From a dividend perspective, should investors buy or avoid Ningbo Dechang Electrical Machinery Made? Ningbo Dechang Electrical Machinery Made's earnings per share have fallen noticeably and, although it paid out less than half its profit as dividends last year, it paid out a disconcertingly high percentage of its cashflow, which is not a great combination. It's not that we think Ningbo Dechang Electrical Machinery Made is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering Ningbo Dechang Electrical Machinery Made 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 Ningbo Dechang Electrical Machinery Made 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.