Four Days Left Until 37 Interactive Entertainment Network Technology Group Co., Ltd. (SZSE:002555) Trades Ex-Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see 37 Interactive Entertainment Network Technology Group Co., Ltd. (SZSE:002555) is about to trade ex-dividend in the next four days. 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. 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 37 Interactive Entertainment Network Technology Group's shares before the 11th of November in order to be eligible for the dividend, which will be paid on the 11th of November.

The company's upcoming dividend is CN¥0.21 a share, following on from the last 12 months, when the company distributed a total of CN¥0.79 per share to shareholders. Based on the last year's worth of payments, 37 Interactive Entertainment Network Technology Group stock has a trailing yield of around 4.6% on the current share price of CN¥17.10. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether 37 Interactive Entertainment Network Technology Group can afford its dividend, and if the dividend could grow.

See our latest analysis for 37 Interactive Entertainment Network Technology Group

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. 37 Interactive Entertainment Network Technology Group paid out more than half (74%) of its earnings last year, which is a regular payout ratio for most companies. 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. 37 Interactive Entertainment Network Technology Group paid out more free cash flow than it generated - 150%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

37 Interactive Entertainment Network Technology Group 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.

While 37 Interactive Entertainment Network Technology Group's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were 37 Interactive Entertainment Network Technology Group to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. For this reason, we're glad to see 37 Interactive Entertainment Network Technology Group's earnings per share have risen 18% per annum over the last five years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, 37 Interactive Entertainment Network Technology Group has lifted its dividend by approximately 36% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

Final Takeaway

Is 37 Interactive Entertainment Network Technology Group an attractive dividend stock, or better left on the shelf? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note 37 Interactive Entertainment Network Technology Group paid out a much higher percentage of its free cash flow, which makes us uncomfortable. All things considered, we are not particularly enthused about 37 Interactive Entertainment Network Technology Group from a dividend perspective.

If you want to look further into 37 Interactive Entertainment Network Technology Group, it's worth knowing the risks this business faces. For example, we've found 1 warning sign for 37 Interactive Entertainment Network Technology Group that we recommend you consider before investing in the business.

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.