Don't Buy Zhejiang Longsheng Group Co.,Ltd (SHSE:600352) For Its Next Dividend Without Doing These Checks

Zhejiang Longsheng Group Co.,Ltd (SHSE:600352) is about to trade ex-dividend in the next three days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. Meaning, you will need to purchase Zhejiang Longsheng GroupLtd's shares before the 30th of May to receive the dividend, which will be paid on the 30th of May.

The company's next dividend payment will be CN¥0.25 per share, on the back of last year when the company paid a total of CN¥0.25 to shareholders. Calculating the last year's worth of payments shows that Zhejiang Longsheng GroupLtd has a trailing yield of 2.8% on the current share price of CN¥9.03. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Zhejiang Longsheng GroupLtd can afford its dividend, and if the dividend could grow.

View our latest analysis for Zhejiang Longsheng GroupLtd

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. Zhejiang Longsheng GroupLtd paid out 57% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Zhejiang Longsheng GroupLtd generated enough free cash flow to afford its dividend. Over the past year it paid out 172% of its free cash flow as dividends, which is uncomfortably 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.

Zhejiang Longsheng GroupLtd paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Zhejiang Longsheng GroupLtd 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?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see Zhejiang Longsheng GroupLtd's earnings per share have dropped 19% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

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, Zhejiang Longsheng GroupLtd has lifted its dividend by approximately 6.4% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.

The Bottom Line

Has Zhejiang Longsheng GroupLtd got what it takes to maintain its dividend payments? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. It's not that we think Zhejiang Longsheng GroupLtd is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Zhejiang Longsheng GroupLtd and want to know more, you'll find it very useful to know what risks this stock faces. Our analysis shows 3 warning signs for Zhejiang Longsheng GroupLtd and you should be aware of these 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.