It Might Not Be A Great Idea To Buy Zhang Xiaoquan Inc. (SZSE:301055) For Its Next Dividend

Readers hoping to buy Zhang Xiaoquan Inc. (SZSE:301055) 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 important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Therefore, if you purchase Zhang Xiaoquan's shares on or after the 24th of June, you won't be eligible to receive the dividend, when it is paid on the 24th of June.

The company's next dividend payment will be CN¥0.15 per share, on the back of last year when the company paid a total of CN¥0.15 to shareholders. Last year's total dividend payments show that Zhang Xiaoquan has a trailing yield of 1.2% on the current share price of CN¥12.85. 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! So we need to investigate whether Zhang Xiaoquan can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Zhang Xiaoquan

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year, Zhang Xiaoquan paid out 94% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. Fortunately, it paid out only 49% of its free cash flow in the past year.

It's good to see that while Zhang Xiaoquan's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

Click here to see how much of its profit Zhang Xiaoquan 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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Zhang Xiaoquan's earnings per share have fallen at approximately 16% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Zhang Xiaoquan has seen its dividend decline 45% per annum on average over the past two years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

The Bottom Line

Has Zhang Xiaoquan got what it takes to maintain its dividend payments? It's not a great combination to see a company with earnings in decline and paying out 94% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Zhang Xiaoquan's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not that we think Zhang Xiaoquan is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in Zhang Xiaoquan despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example - Zhang Xiaoquan has 4 warning signs we think you should be aware of.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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