Here's Why We're Wary Of Buying Cofoe Medical TechnologyLtd's (SZSE:301087) For Its Upcoming Dividend

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 Cofoe Medical Technology Co.,Ltd. (SZSE:301087) is about to go ex-dividend in just 3 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled 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. Meaning, you will need to purchase Cofoe Medical TechnologyLtd's shares before the 11th of October to receive the dividend, which will be paid on the 11th of October.

The company's next dividend payment will be CN¥0.60 per share, and in the last 12 months, the company paid a total of CN¥1.20 per share. Looking at the last 12 months of distributions, Cofoe Medical TechnologyLtd has a trailing yield of approximately 3.0% on its current stock price of CN¥39.97. 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 152% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether Cofoe Medical TechnologyLtd generated enough free cash flow to afford its dividend. It paid out an unsustainably high 245% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since Cofoe Medical TechnologyLtd is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

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.

As Cofoe Medical TechnologyLtd's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

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?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. For this reason, we're glad to see Cofoe Medical TechnologyLtd's earnings per share have risen 14% 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 152% of earnings. Unless there are extenuating circumstances, we feel this is a clear concern around the sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. 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

Should investors buy Cofoe Medical TechnologyLtd for the upcoming dividend? While it's nice to see earnings per share growing, we're curious about how Cofoe Medical TechnologyLtd intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

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. To help with this, we've discovered 2 warning signs for Cofoe Medical TechnologyLtd that you should be aware of before investing in their shares.

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.