Why It Might Not Make Sense To Buy Wuxi Honghui New Materials Technology Co., Ltd. (SZSE:002802) For Its Upcoming Dividend

Readers hoping to buy Wuxi Honghui New Materials Technology Co., Ltd. (SZSE:002802) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. 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 Wuxi Honghui New Materials Technology's shares before the 22nd of July in order to receive the dividend, which the company will pay on the 22nd of July.

The company's upcoming dividend is CN¥0.25 a share, following on from the last 12 months, when the company distributed a total of CN¥0.25 per share to shareholders. Last year's total dividend payments show that Wuxi Honghui New Materials Technology has a trailing yield of 3.2% on the current share price of CN¥7.90. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Wuxi Honghui New Materials Technology has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Wuxi Honghui New Materials Technology

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. Last year Wuxi Honghui New Materials Technology paid out 105% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the past year it paid out 143% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Wuxi Honghui New Materials Technology does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

As Wuxi Honghui New Materials Technology's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see how much of its profit Wuxi Honghui New Materials Technology 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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by Wuxi Honghui New Materials Technology's 9.5% per annum decline in earnings in 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. Wuxi Honghui New Materials Technology has delivered 4.4% dividend growth per year on average over the past eight years. 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. Wuxi Honghui New Materials Technology is already paying out 105% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

Should investors buy Wuxi Honghui New Materials Technology for the upcoming dividend? Not only are earnings per share declining, but Wuxi Honghui New Materials Technology is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. Bottom line: Wuxi Honghui New Materials Technology has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Although, if you're still interested in Wuxi Honghui New Materials Technology and want to know more, you'll find it very useful to know what risks this stock faces. For example, Wuxi Honghui New Materials Technology has 3 warning signs (and 1 which is potentially serious) we think you should know about.

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