Is It Smart To Buy Huadong Medicine Co., Ltd (SZSE:000963) Before It Goes Ex-Dividend?

Huadong Medicine Co., Ltd (SZSE:000963) stock is about to trade ex-dividend in four 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. Thus, you can purchase Huadong Medicine's shares before the 28th of May in order to receive the dividend, which the company will pay on the 28th of May.

The company's next dividend payment will be CN¥0.58 per share, and in the last 12 months, the company paid a total of CN¥0.58 per share. Based on the last year's worth of payments, Huadong Medicine has a trailing yield of 1.8% on the current stock price of CN¥31.62. If you buy this business for its dividend, you should have an idea of whether Huadong Medicine's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Huadong Medicine

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. Huadong Medicine paid out a comfortable 34% of its profit last year. A useful secondary check can be to evaluate whether Huadong Medicine generated enough free cash flow to afford its dividend. Fortunately, it paid out only 29% of its free cash flow in the past year.

It's positive to see that Huadong Medicine'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?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Huadong Medicine, with earnings per share up 5.5% 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. Since the start of our data, 10 years ago, Huadong Medicine has lifted its dividend by approximately 12% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

From a dividend perspective, should investors buy or avoid Huadong Medicine? Earnings per share growth has been growing somewhat, and Huadong Medicine is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. It might be nice to see earnings growing faster, but Huadong Medicine is being conservative with its dividend payouts and could still perform reasonably over the long run. Huadong Medicine looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

While it's tempting to invest in Huadong Medicine for the dividends alone, you should always be mindful of the risks involved. Our analysis shows 1 warning sign for Huadong Medicine and you should be aware of it before buying any shares.

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.