Don't Buy Zhejiang Gongdong Medical Technology Co., Ltd. (SHSE:605369) For Its Next Dividend Without Doing These Checks

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Zhejiang Gongdong Medical Technology Co., Ltd. (SHSE:605369) is about to go ex-dividend in just three 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 because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. This means that investors who purchase Zhejiang Gongdong Medical Technology's shares on or after the 9th of July will not receive the dividend, which will be paid on the 9th of July.

The company's next dividend payment will be CN¥0.30 per share. Last year, in total, the company distributed CN¥0.80 to shareholders. Based on the last year's worth of payments, Zhejiang Gongdong Medical Technology has a trailing yield of 2.0% on the current stock price of CN¥39.60. If you buy this business for its dividend, you should have an idea of whether Zhejiang Gongdong Medical Technology's dividend is reliable and sustainable. As a result, readers should always check whether Zhejiang Gongdong Medical Technology has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Zhejiang Gongdong Medical Technology

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. Zhejiang Gongdong Medical Technology paid out more than half (72%) of its earnings last year, which is a regular payout ratio for most companies. 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. It paid out 102% 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.

Zhejiang Gongdong Medical Technology 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.

While Zhejiang Gongdong Medical Technology's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Zhejiang Gongdong Medical Technology 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?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That explains why we're not overly excited about Zhejiang Gongdong Medical Technology's flat earnings over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Zhejiang Gongdong Medical Technology's dividend payments per share have declined at 15% per year on average over the past three years, which is uninspiring.

The Bottom Line

Is Zhejiang Gongdong Medical Technology worth buying for its dividend? Zhejiang Gongdong Medical Technology is paying out a reasonable percentage of its income yet an uncomfortably high 102% of its cash flow as dividends. What's more, earnings have barely grown. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Zhejiang Gongdong Medical Technology.

With that in mind though, if the poor dividend characteristics of Zhejiang Gongdong Medical Technology don't faze you, it's worth being mindful of the risks involved with this business. In terms of investment risks, we've identified 2 warning signs with Zhejiang Gongdong Medical Technology 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com