Why It Might Not Make Sense To Buy Marssenger Kitchenware Co., Ltd. (SZSE:300894) For Its Upcoming Dividend

Readers hoping to buy Marssenger Kitchenware Co., Ltd. (SZSE:300894) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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 Marssenger Kitchenware's shares before the 28th of May in order to be eligible for the dividend, which will be paid on the 28th of May.

The company's next dividend payment will be CN¥0.60 per share. Last year, in total, the company distributed CN¥0.60 to shareholders. Looking at the last 12 months of distributions, Marssenger Kitchenware has a trailing yield of approximately 3.4% on its current stock price of CN¥17.76. 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 Marssenger Kitchenware

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year Marssenger Kitchenware paid out 104% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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. Marssenger Kitchenware paid out more free cash flow than it generated - 138%, to be precise - last year, which we think is concerningly 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.

Marssenger Kitchenware 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.

Cash is slightly more important than profit from a dividend perspective, but given Marssenger Kitchenware's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

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. Fortunately for readers, Marssenger Kitchenware's earnings per share have been growing at 15% a year for the past five years. It's not encouraging to see Marssenger Kitchenware paying out basically all of its earnings and cashflow to shareholders. We're glad that earnings are growing rapidly, but we're wary of the company stretching itself financially.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Marssenger Kitchenware's dividend payments are broadly unchanged compared to where they were three years ago.

The Bottom Line

Is Marssenger Kitchenware worth buying for its dividend? While it's nice to see earnings per share growing, we're curious about how Marssenger Kitchenware intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. Bottom line: Marssenger Kitchenware has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

So if you're still interested in Marssenger Kitchenware despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. In terms of investment risks, we've identified 2 warning signs with Marssenger Kitchenware and understanding them should be part of your investment process.

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.