Should You Buy China National Medicines Corporation Ltd. (SHSE:600511) For Its Upcoming Dividend?

China National Medicines Corporation Ltd. (SHSE:600511) stock is about to trade ex-dividend in 3 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a 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. Accordingly, China National Medicines investors that purchase the stock on or after the 13th of June will not receive the dividend, which will be paid on the 13th of June.

The company's upcoming dividend is CN¥0.854 a share, following on from the last 12 months, when the company distributed a total of CN¥0.85 per share to shareholders. Based on the last year's worth of payments, China National Medicines stock has a trailing yield of around 2.5% on the current share price of CN¥34.38. If you buy this business for its dividend, you should have an idea of whether China National Medicines's dividend is reliable and sustainable. 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 China National Medicines

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. China National Medicines paid out a comfortable 29% of its profit last year. 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. Fortunately, it paid out only 36% of its free cash flow in the past year.

It's positive to see that China National Medicines's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at China National Medicines, with earnings per share up 9.7% on average over the last five years. Management have been reinvested more than half of the company's earnings within the business, and the company has been able to grow earnings with this retained capital. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. China National Medicines has delivered 13% dividend growth per year on average over the past 10 years. 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

Has China National Medicines got what it takes to maintain its dividend payments? Earnings per share have been growing moderately, and China National Medicines is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and China National Medicines is halfway there. It's a promising combination that should mark this company worthy of closer attention.

In light of that, while China National Medicines has an appealing dividend, it's worth knowing the risks involved with this stock. Every company has risks, and we've spotted 1 warning sign for China National Medicines you should know about.

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.