Dividend Investors: Don't Be Too Quick To Buy Cofoe Medical Technology Co.,Ltd. (SZSE:301087) For Its Upcoming Dividend

Cofoe Medical Technology Co.,Ltd. (SZSE:301087) stock is about to trade ex-dividend in 4 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Therefore, if you purchase Cofoe Medical TechnologyLtd's shares on or after the 12th of June, you won't be eligible to receive the dividend, when it is paid on the 12th of June.

The company's next dividend payment will be CN¥1.20 per share. Last year, in total, the company distributed CN¥1.20 to shareholders. Last year's total dividend payments show that Cofoe Medical TechnologyLtd has a trailing yield of 3.4% on the current share price of CN¥35.51. If you buy this business for its dividend, you should have an idea of whether Cofoe Medical TechnologyLtd's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Cofoe Medical TechnologyLtd

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. Cofoe Medical TechnologyLtd distributed an unsustainably high 111% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. Cofoe Medical TechnologyLtd paid out more free cash flow than it generated - 146%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Cofoe Medical TechnologyLtd 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.

Cash is slightly more important than profit from a dividend perspective, but given Cofoe Medical TechnologyLtd's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

Click here to see how much of its profit Cofoe Medical TechnologyLtd paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. For this reason, we're glad to see Cofoe Medical TechnologyLtd's earnings per share have risen 13% per annum over the last five years. Earnings are growing pretty quickly, which is great, but it's uncomfortably to see the company paying out 111% of earnings. We're wary of fast-growing companies flaming out by over-committing themselves financially, and consider this a yellow flag.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Cofoe Medical TechnologyLtd has seen its dividend decline 1.3% per annum on average over the past two years, which is not great to see.

Final Takeaway

Is Cofoe Medical TechnologyLtd an attractive dividend stock, or better left on the shelf? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. It's not that we think Cofoe Medical TechnologyLtd is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in Cofoe Medical TechnologyLtd despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For instance, we've identified 3 warning signs for Cofoe Medical TechnologyLtd (2 can't be ignored) you should be aware of.

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.