Here's Why We're Wary Of Buying Jizhong Energy Resources' (SZSE:000937) For Its Upcoming Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Jizhong Energy Resources Co., Ltd. (SZSE:000937) is about to go ex-dividend in just four days. 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. This means that investors who purchase Jizhong Energy Resources' shares on or after the 12th of June will not receive the dividend, which will be paid on the 12th of June.

The company's next dividend payment will be CN¥0.60 per share, on the back of last year when the company paid a total of CN¥0.60 to shareholders. Based on the last year's worth of payments, Jizhong Energy Resources has a trailing yield of 7.3% on the current stock price of CN¥8.17. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Jizhong Energy Resources has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Jizhong Energy Resources

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Jizhong Energy Resources distributed an unsustainably high 145% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether Jizhong Energy Resources generated enough free cash flow to afford its dividend. Over the last year, it paid out dividends equivalent to 316% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how Jizhong Energy Resources intends to continue funding this dividend, or if it could be forced to cut the payment.

Cash is slightly more important than profit from a dividend perspective, but given Jizhong Energy Resources'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 how much of its profit Jizhong Energy Resources paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Fortunately for readers, Jizhong Energy Resources's earnings per share have been growing at 11% a year for the past five years. It's great to see earnings per share growing rapidly, but we're disturbed to see the company paid out 145% of its earnings last year. We're wary of fast-growing companies flaming out by over-committing themselves financially, and consider this a yellow flag.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Jizhong Energy Resources has delivered an average of 12% per year annual increase in its dividend, based on the past 10 years of dividend payments. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

Final Takeaway

Has Jizhong Energy Resources got what it takes to maintain its dividend payments? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Jizhong Energy Resources. To that end, you should learn about the 2 warning signs we've spotted with Jizhong Energy Resources (including 1 which doesn't sit too well with us).

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.