Here's Why We're Wary Of Buying Hangzhou Electronic Soul Network Technology's (SHSE:603258) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Hangzhou Electronic Soul Network Technology Co., Ltd. (SHSE:603258) is about to trade ex-dividend in the next two 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 Hangzhou Electronic Soul Network Technology's shares on or after the 17th of October, you won't be eligible to receive the dividend, when it is paid on the 17th of October.

The company's next dividend payment will be CN¥0.232 per share. Last year, in total, the company distributed CN¥0.21 to shareholders. Calculating the last year's worth of payments shows that Hangzhou Electronic Soul Network Technology has a trailing yield of 1.3% on the current share price of CN¥17.81. If you buy this business for its dividend, you should have an idea of whether Hangzhou Electronic Soul Network Technology's dividend is reliable and sustainable. So we need to investigate whether Hangzhou Electronic Soul Network Technology can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Hangzhou Electronic Soul Network Technology

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. Hangzhou Electronic Soul Network Technology paid out a disturbingly high 361% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Fortunately, it paid out only 44% of its free cash flow in the past year.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Hangzhou Electronic Soul Network Technology fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Hangzhou Electronic Soul Network Technology's earnings per share have fallen at approximately 26% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Hangzhou Electronic Soul Network Technology has seen its dividend decline 8.0% per annum on average over the past seven years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

Final Takeaway

Is Hangzhou Electronic Soul Network Technology an attractive dividend stock, or better left on the shelf? It's never great to see earnings per share declining, especially when a company is paying out 361% 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. Bottom line: Hangzhou Electronic Soul Network Technology has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering Hangzhou Electronic Soul Network Technology 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 Hangzhou Electronic Soul Network Technology 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.