Why It Might Not Make Sense To Buy Ganso Co., Ltd. (SHSE:603886) For Its Upcoming Dividend

Readers hoping to buy Ganso Co., Ltd. (SHSE:603886) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Thus, you can purchase Ganso's shares before the 30th of May in order to receive the dividend, which the company will pay on the 30th of May.

The company's upcoming dividend is CN¥1.00 a share, following on from the last 12 months, when the company distributed a total of CN¥1.00 per share to shareholders. Based on the last year's worth of payments, Ganso stock has a trailing yield of around 6.0% on the current share price of CN¥16.57. If you buy this business for its dividend, you should have an idea of whether Ganso's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Ganso

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year Ganso paid out 92% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether Ganso generated enough free cash flow to afford its dividend. Dividends consumed 59% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's good to see that while Ganso'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 the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's not encouraging to see that Ganso's earnings are effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.

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, seven years ago, Ganso has lifted its dividend by approximately 23% a year on average.

Final Takeaway

Should investors buy Ganso for the upcoming dividend? Flat earnings per share and a high payout ratio are not what we like to see, although at least it paid out a lower percentage of its free cash flow. Bottom line: Ganso has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of Ganso don't faze you, it's worth being mindful of the risks involved with this business. In terms of investment risks, we've identified 1 warning sign with Ganso 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.