Dividend Investors: Don't Be Too Quick To Buy Anhui Kouzi Distillery Co., Ltd. (SHSE:603589) For Its Upcoming Dividend

It looks like Anhui Kouzi Distillery Co., Ltd. (SHSE:603589) is about to go ex-dividend in the next three 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Accordingly, Anhui Kouzi Distillery investors that purchase the stock on or after the 4th of July will not receive the dividend, which will be paid on the 4th of July.

The company's next dividend payment will be CN¥1.50 per share. Last year, in total, the company distributed CN¥1.50 to shareholders. Based on the last year's worth of payments, Anhui Kouzi Distillery stock has a trailing yield of around 3.8% on the current share price of CN¥39.19. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Anhui Kouzi Distillery can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Anhui Kouzi Distillery

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. Anhui Kouzi Distillery paid out 51% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Anhui Kouzi Distillery generated enough free cash flow to afford its dividend. Over the past year it paid out 115% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Anhui Kouzi Distillery paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Anhui Kouzi Distillery's ability to maintain its dividend.

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

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. This is why it's a relief to see Anhui Kouzi Distillery earnings per share are up 3.0% per annum over the last five years. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past eight years, Anhui Kouzi Distillery has increased its dividend at approximately 20% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

The Bottom Line

Is Anhui Kouzi Distillery worth buying for its dividend? Anhui Kouzi Distillery is paying out a reasonable percentage of its income and an uncomfortably high 115% of its cash flow as dividends. At least earnings per share have been growing steadily. It's not that we think Anhui Kouzi Distillery is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

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 Anhui Kouzi Distillery. Case in point: We've spotted 1 warning sign for Anhui Kouzi Distillery you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.

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