Here's Why We're Wary Of Buying Xiamen Hexing Packaging Printing's (SZSE:002228) For Its Upcoming Dividend

Xiamen Hexing Packaging Printing Co., Ltd. (SZSE:002228) 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. This means that investors who purchase Xiamen Hexing Packaging Printing's shares on or after the 6th of June will not receive the dividend, which will be paid on the 6th of June.

The company's next dividend payment will be CN¥0.12 per share. Last year, in total, the company distributed CN¥0.12 to shareholders. Based on the last year's worth of payments, Xiamen Hexing Packaging Printing has a trailing yield of 4.4% on the current stock price of CN¥2.73. If you buy this business for its dividend, you should have an idea of whether Xiamen Hexing Packaging Printing's dividend is reliable and sustainable. So we need to investigate whether Xiamen Hexing Packaging Printing can afford its dividend, and if the dividend could grow.

View our latest analysis for Xiamen Hexing Packaging Printing

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Xiamen Hexing Packaging Printing distributed an unsustainably high 133% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether Xiamen Hexing Packaging Printing generated enough free cash flow to afford its dividend. It paid out more than half (69%) of its free cash flow in the past year, which is within an average range for most companies.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Xiamen Hexing Packaging Printing fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Xiamen Hexing Packaging Printing paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Xiamen Hexing Packaging Printing's earnings per share have fallen at approximately 15% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Xiamen Hexing Packaging Printing has lifted its dividend by approximately 21% a year on average. 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. Xiamen Hexing Packaging Printing is already paying out 133% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

From a dividend perspective, should investors buy or avoid Xiamen Hexing Packaging Printing? It's never fun to see a company's earnings per share in retreat. What's more, Xiamen Hexing Packaging Printing is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Although, if you're still interested in Xiamen Hexing Packaging Printing and want to know more, you'll find it very useful to know what risks this stock faces. Our analysis shows 1 warning sign for Xiamen Hexing Packaging Printing and you should be aware of it 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.