Here's Why We're Wary Of Buying Henan Shuanghui Investment & DevelopmentLtd's (SZSE:000895) For Its Upcoming Dividend

Henan Shuanghui Investment & Development Co.,Ltd. (SZSE:000895) is about to trade ex-dividend in the next couple of 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. Meaning, you will need to purchase Henan Shuanghui Investment & DevelopmentLtd's shares before the 11th of September to receive the dividend, which will be paid on the 11th of September.

The company's next dividend payment will be CN¥0.66 per share, and in the last 12 months, the company paid a total of CN¥1.45 per share. Calculating the last year's worth of payments shows that Henan Shuanghui Investment & DevelopmentLtd has a trailing yield of 6.2% on the current share price of CN¥23.54. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Henan Shuanghui Investment & DevelopmentLtd

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Henan Shuanghui Investment & DevelopmentLtd is paying out an acceptable 54% of its profit, a common payout level among most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 106% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

Henan Shuanghui Investment & DevelopmentLtd paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Henan Shuanghui Investment & DevelopmentLtd to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's not ideal to see Henan Shuanghui Investment & DevelopmentLtd's earnings per share have been shrinking at 2.6% a year over the previous five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Henan Shuanghui Investment & DevelopmentLtd has lifted its dividend by approximately 4.1% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.

The Bottom Line

Should investors buy Henan Shuanghui Investment & DevelopmentLtd for the upcoming dividend? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. 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 Henan Shuanghui Investment & DevelopmentLtd. Every company has risks, and we've spotted 1 warning sign for Henan Shuanghui Investment & DevelopmentLtd you should know about.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.