Do These 3 Checks Before Buying Chen Ke Ming Food Manufacturing Co., Ltd. (SZSE:002661) For Its Upcoming Dividend

Chen Ke Ming Food Manufacturing Co., Ltd. (SZSE:002661) is about to trade ex-dividend in the next 2 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase Chen Ke Ming Food Manufacturing's shares before the 27th of September in order to receive the dividend, which the company will pay on the 27th of September.

The company's upcoming dividend is CN¥0.20 a share, following on from the last 12 months, when the company distributed a total of CN¥0.40 per share to shareholders. Based on the last year's worth of payments, Chen Ke Ming Food Manufacturing has a trailing yield of 4.9% on the current stock price of CN¥8.10. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Chen Ke Ming Food Manufacturing

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. An unusually high payout ratio of 253% of its profit suggests something is happening other than the usual distribution of profits to shareholders. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Dividends consumed 74% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Chen Ke Ming Food Manufacturing fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Chen Ke Ming Food Manufacturing paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Chen Ke Ming Food Manufacturing's earnings per share have plummeted approximately 33% a year over the previous five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Chen Ke Ming Food Manufacturing has increased its dividend at approximately 9.1% 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. Chen Ke Ming Food Manufacturing is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

Is Chen Ke Ming Food Manufacturing worth buying for its dividend? It's never fun to see a company's earnings per share in retreat. Additionally, Chen Ke Ming Food Manufacturing is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. It's not that we think Chen Ke Ming Food Manufacturing 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 Chen Ke Ming Food Manufacturing. Our analysis shows 6 warning signs for Chen Ke Ming Food Manufacturing that we strongly recommend you have a look at before investing in the company.

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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.