Why It Might Not Make Sense To Buy YouYou Foods Co., Ltd. (SHSE:603697) For Its Upcoming Dividend

YouYou Foods Co., Ltd. (SHSE:603697) is about to trade ex-dividend in the next two days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the 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. In other words, investors can purchase YouYou Foods' shares before the 26th of December in order to be eligible for the dividend, which will be paid on the 26th of December.

The company's next dividend payment will be CN¥0.10 per share, and in the last 12 months, the company paid a total of CN¥0.32 per share. Based on the last year's worth of payments, YouYou Foods stock has a trailing yield of around 3.1% on the current share price of CN¥10.28. 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 YouYou Foods has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for YouYou Foods

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. YouYou Foods distributed an unsustainably high 136% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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. Over the past year it paid out 174% 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.

YouYou Foods 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 YouYou Foods'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 YouYou Foods paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. YouYou Foods's earnings per share have fallen at approximately 11% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, five years ago, YouYou Foods has lifted its dividend by approximately 4.5% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. YouYou Foods is already paying out 136% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Is YouYou Foods an attractive dividend stock, or better left on the shelf? Not only are earnings per share declining, but YouYou Foods is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. It's not that we think YouYou Foods 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 YouYou Foods. In terms of investment risks, we've identified 2 warning signs with YouYou Foods and understanding them should be part of your investment process.

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.