Here's Why We're Wary Of Buying Jinfa Labi Maternity & Baby Articles' (SZSE:002762) For Its Upcoming Dividend

It looks like Jinfa Labi Maternity & Baby Articles Co., Ltd (SZSE:002762) is about to go ex-dividend in the next day or two. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled 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. In other words, investors can purchase Jinfa Labi Maternity & Baby Articles' shares before the 23rd of May in order to be eligible for the dividend, which will be paid on the 23rd of May.

The company's upcoming dividend is CN¥0.05 a share, following on from the last 12 months, when the company distributed a total of CN¥0.05 per share to shareholders. Last year's total dividend payments show that Jinfa Labi Maternity & Baby Articles has a trailing yield of 0.8% on the current share price of CN¥6.38. 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! As a result, readers should always check whether Jinfa Labi Maternity & Baby Articles has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Jinfa Labi Maternity & Baby Articles

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. Jinfa Labi Maternity & Baby Articles paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Over the past year it paid out 118% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Jinfa Labi Maternity & Baby Articles does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

Click here to see how much of its profit Jinfa Labi Maternity & Baby Articles 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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Jinfa Labi Maternity & Baby Articles reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. It looks like the Jinfa Labi Maternity & Baby Articles dividends are largely the same as they were nine years ago. If a company's dividend stays flat while earnings are in decline, this is typically a sign that it is paying out a larger percentage of its earnings. This can become unsustainable if earnings fall far enough.

Remember, you can always get a snapshot of Jinfa Labi Maternity & Baby Articles's financial health, by checking our visualisation of its financial health, here.

Final Takeaway

Is Jinfa Labi Maternity & Baby Articles worth buying for its dividend? We're a bit uncomfortable with it paying a dividend while being loss-making, especially given that the dividend was not well covered by free cash flow. It's not that we think Jinfa Labi Maternity & Baby Articles is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Jinfa Labi Maternity & Baby Articles and want to know more, you'll find it very useful to know what risks this stock faces. For example - Jinfa Labi Maternity & Baby Articles has 2 warning signs we think 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.