Why It Might Not Make Sense To Buy China Hainan Rubber Industry Group Co.,Ltd. (SHSE:601118) For Its Upcoming Dividend

China Hainan Rubber Industry Group Co.,Ltd. (SHSE:601118) is about to trade ex-dividend in the next 2 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the 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. Accordingly, China Hainan Rubber Industry GroupLtd investors that purchase the stock on or after the 17th of July will not receive the dividend, which will be paid on the 17th of July.

The company's next dividend payment will be CN¥0.0209 per share, on the back of last year when the company paid a total of CN¥0.021 to shareholders. Based on the last year's worth of payments, China Hainan Rubber Industry GroupLtd has a trailing yield of 0.5% on the current stock price of CN¥4.55. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for China Hainan Rubber Industry 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. China Hainan Rubber Industry GroupLtd paid out a comfortable 47% of its profit last year. 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. The company paid out 97% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

China Hainan Rubber Industry GroupLtd paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to China Hainan Rubber Industry GroupLtd's ability to maintain its dividend.

Click here to see how much of its profit China Hainan Rubber Industry GroupLtd paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. So we're not too excited that China Hainan Rubber Industry GroupLtd's earnings are down 4.4% a year over the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. It looks like the China Hainan Rubber Industry GroupLtd dividends are largely the same as they were 10 years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.

The Bottom Line

Is China Hainan Rubber Industry GroupLtd worth buying for its dividend? It's disappointing to see earnings per share declining, and this would ordinarily be enough to discourage us from most dividend stocks, even though China Hainan Rubber Industry GroupLtd is paying out less than half its income as dividends. However, it's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. Bottom line: China Hainan Rubber Industry GroupLtd has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of China Hainan Rubber Industry GroupLtd don't faze you, it's worth being mindful of the risks involved with this business. To help with this, we've discovered 2 warning signs for China Hainan Rubber Industry GroupLtd (1 is potentially serious!) that you ought to be aware of before buying the 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.

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