Why It Might Not Make Sense To Buy Ningbo Fuda Company Limited (SHSE:600724) For Its Upcoming Dividend

Ningbo Fuda Company Limited (SHSE:600724) is about to trade ex-dividend in the next two 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Thus, you can purchase Ningbo Fuda's shares before the 14th of June in order to receive the dividend, which the company will pay on the 14th of June.

The company's next dividend payment will be CN¥0.15 per share, on the back of last year when the company paid a total of CN¥0.15 to shareholders. Calculating the last year's worth of payments shows that Ningbo Fuda has a trailing yield of 3.4% on the current share price of CN¥4.36. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Ningbo Fuda can afford its dividend, and if the dividend could grow.

See our latest analysis for Ningbo Fuda

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. Last year, Ningbo Fuda paid out 92% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. A useful secondary check can be to evaluate whether Ningbo Fuda generated enough free cash flow to afford its dividend. It paid out more than half (60%) of its free cash flow in the past year, which is within an average range for most companies.

It's good to see that while Ningbo Fuda's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

Click here to see how much of its profit Ningbo Fuda paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Ningbo Fuda's earnings per share have fallen at approximately 20% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Ningbo Fuda has delivered an average of 2.3% per year annual increase in its dividend, based on the past 10 years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Ningbo Fuda is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

Is Ningbo Fuda worth buying for its dividend? It's never fun to see a company's earnings per share in retreat. Additionally, Ningbo Fuda is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Ningbo Fuda.

So if you're still interested in Ningbo Fuda despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For instance, we've identified 2 warning signs for Ningbo Fuda (1 doesn't sit too well with us) you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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

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.