Don't Race Out To Buy Fujian Minfa Aluminium Inc. (SZSE:002578) Just Because It's Going Ex-Dividend

It looks like Fujian Minfa Aluminium Inc. (SZSE:002578) is about to go ex-dividend in the next 3 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase Fujian Minfa Aluminium's shares before the 6th of June in order to be eligible for the dividend, which will be paid on the 6th of June.

The company's next dividend payment will be CN¥0.04 per share, and in the last 12 months, the company paid a total of CN¥0.04 per share. Looking at the last 12 months of distributions, Fujian Minfa Aluminium has a trailing yield of approximately 1.3% on its current stock price of CN¥3.05. If you buy this business for its dividend, you should have an idea of whether Fujian Minfa Aluminium's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Fujian Minfa Aluminium

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Fujian Minfa Aluminium distributed an unsustainably high 138% 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 Fujian Minfa Aluminium generated enough free cash flow to afford its dividend. Fujian Minfa Aluminium paid a dividend despite reporting negative free cash flow over the last twelve months. This may be due to heavy investment in the business, but this is still suboptimal from a dividend sustainability perspective.

It's good to see that while Fujian Minfa Aluminium'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 Fujian Minfa Aluminium 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. 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 Fujian Minfa Aluminium's earnings per share have dropped 7.1% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Fujian Minfa Aluminium's dividend payments are broadly unchanged compared to where they were nine 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.

Final Takeaway

Should investors buy Fujian Minfa Aluminium for the upcoming dividend? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (138%) and cash flow as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Fujian Minfa Aluminium.

With that being said, if you're still considering Fujian Minfa Aluminium as an investment, you'll find it beneficial to know what risks this stock is facing. Every company has risks, and we've spotted 3 warning signs for Fujian Minfa Aluminium (of which 2 are potentially serious!) you should know about.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.