Why It Might Not Make Sense To Buy Zhejiang Meida Industrial Co., Ltd. (SZSE:002677) For Its Upcoming Dividend

Zhejiang Meida Industrial Co., Ltd. (SZSE:002677) is about to trade ex-dividend in the next day or two. 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Meaning, you will need to purchase Zhejiang Meida Industrial's shares before the 24th of May to receive the dividend, which will be paid on the 24th of May.

The company's upcoming dividend is CN¥0.75 a share, following on from the last 12 months, when the company distributed a total of CN¥0.75 per share to shareholders. Based on the last year's worth of payments, Zhejiang Meida Industrial stock has a trailing yield of around 7.1% on the current share price of CN¥10.53. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Zhejiang Meida Industrial

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Zhejiang Meida Industrial distributed an unsustainably high 110% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. It paid out 84% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's good to see that while Zhejiang Meida Industrial's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Zhejiang Meida Industrial earnings per share are up 2.9% per annum over the last five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Zhejiang Meida Industrial has increased its dividend at approximately 25% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Should investors buy Zhejiang Meida Industrial for the upcoming dividend? While earnings per share have been growing slowly, Zhejiang Meida Industrial is paying out an uncomfortably high percentage of its earnings. However it did pay out a lower percentage of its cashflow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that being said, if you're still considering Zhejiang Meida Industrial 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 Meida Industrial 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.