Don't Race Out To Buy Shanghai Shenqi Pharmaceutical Investment Management Co., Ltd. (SHSE:600613) Just Because It's Going Ex-Dividend

Shanghai Shenqi Pharmaceutical Investment Management Co., Ltd. (SHSE:600613) stock is about to trade ex-dividend in 3 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. This means that investors who purchase Shanghai Shenqi Pharmaceutical Investment Management's shares on or after the 18th of June will not receive the dividend, which will be paid on the 18th of June.

The company's upcoming dividend is CN¥0.10 a share, following on from the last 12 months, when the company distributed a total of CN¥0.10 per share to shareholders. Based on the last year's worth of payments, Shanghai Shenqi Pharmaceutical Investment Management stock has a trailing yield of around 1.8% on the current share price of CN¥5.71. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Shanghai Shenqi Pharmaceutical Investment Management

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year, Shanghai Shenqi Pharmaceutical Investment Management paid out 91% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. Thankfully its dividend payments took up just 31% of the free cash flow it generated, which is a comfortable payout ratio.

It's good to see that while Shanghai Shenqi Pharmaceutical Investment Management'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 how much of its profit Shanghai Shenqi Pharmaceutical Investment Management paid out over the last 12 months.

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. With that in mind, we're discomforted by Shanghai Shenqi Pharmaceutical Investment Management's 12% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past nine years, Shanghai Shenqi Pharmaceutical Investment Management has increased its dividend at approximately 7.0% a year on average. 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. Shanghai Shenqi Pharmaceutical Investment Management is already paying out 91% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Is Shanghai Shenqi Pharmaceutical Investment Management an attractive dividend stock, or better left on the shelf? It's not a great combination to see a company with earnings in decline and paying out 91% of its profits, which could imply the dividend may be at risk of being cut in the future. 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. It's not that we think Shanghai Shenqi Pharmaceutical Investment Management is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Shanghai Shenqi Pharmaceutical Investment Management. Case in point: We've spotted 2 warning signs for Shanghai Shenqi Pharmaceutical Investment Management you should be aware of.

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.

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