Dividend Investors: Don't Be Too Quick To Buy Focus Media Information Technology Co., Ltd. (SZSE:002027) For Its Upcoming Dividend

Readers hoping to buy Focus Media Information Technology Co., Ltd. (SZSE:002027) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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 as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Thus, you can purchase Focus Media Information Technology's shares before the 13th of June in order to receive the dividend, which the company will pay on the 13th of June.

The company's next dividend payment will be CN¥0.33 per share, on the back of last year when the company paid a total of CN¥0.33 to shareholders. Based on the last year's worth of payments, Focus Media Information Technology stock has a trailing yield of around 5.1% on the current share price of CN¥6.51. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Focus Media Information Technology can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Focus Media Information 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. Focus Media Information Technology paid out 97% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (62%) of its free cash flow in the past year, which is within an average range for most companies.

It's good to see that while Focus Media Information Technology's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. So we're not too excited that Focus Media Information Technology's earnings are down 3.1% a year over the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, eight years ago, Focus Media Information Technology has lifted its dividend by approximately 20% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Focus Media Information Technology is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

Should investors buy Focus Media Information Technology for the upcoming dividend? Earnings per share have been in decline, which is not encouraging. Worse, Focus Media Information Technology's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Focus Media Information Technology.

So if you're still interested in Focus Media Information Technology despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. In terms of investment risks, we've identified 1 warning sign with Focus Media Information Technology and understanding them should be part of your investment process.

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.

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

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.