It Might Not Be A Great Idea To Buy Suzhou Longjie Special Fiber Co., Ltd. (SHSE:603332) For Its Next Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Suzhou Longjie Special Fiber Co., Ltd. (SHSE:603332) is about to trade ex-dividend in the next four days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible 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 Suzhou Longjie Special Fiber's shares on or after the 26th of June, you won't be eligible to receive the dividend, when it is paid on the 26th of June.

The company's next dividend payment will be CN¥0.15 per share, and in the last 12 months, the company paid a total of CN¥0.15 per share. Based on the last year's worth of payments, Suzhou Longjie Special Fiber has a trailing yield of 2.0% on the current stock price of CN¥7.56. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Suzhou Longjie Special Fiber

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Suzhou Longjie Special Fiber paid out a disturbingly high 214% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. A useful secondary check can be to evaluate whether Suzhou Longjie Special Fiber generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 30% of the free cash flow it generated, which is a comfortable payout ratio.

It's good to see that while Suzhou Longjie Special Fiber's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit Suzhou Longjie Special Fiber paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Suzhou Longjie Special Fiber's earnings per share have plummeted approximately 41% a year over the previous five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Suzhou Longjie Special Fiber's dividend payments per share have declined at 17% per year on average over the past five years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

The Bottom Line

Should investors buy Suzhou Longjie Special Fiber for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 214% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Suzhou Longjie Special Fiber.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Suzhou Longjie Special Fiber. We've identified 4 warning signs with Suzhou Longjie Special Fiber (at least 1 which is potentially serious), and understanding them should be part of your investment process.

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

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