Dividend Investors: Don't Be Too Quick To Buy Liaoning Chengda Biotechnology Co.,Ltd. (SHSE:688739) For Its Upcoming Dividend

Liaoning Chengda Biotechnology Co.,Ltd. (SHSE:688739) is about to trade ex-dividend in the next 2 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 because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase Liaoning Chengda BiotechnologyLtd's shares before the 20th of June in order to receive the dividend, which the company will pay on the 20th of June.

The company's next dividend payment will be CN¥0.80 per share, on the back of last year when the company paid a total of CN¥0.80 to shareholders. Calculating the last year's worth of payments shows that Liaoning Chengda BiotechnologyLtd has a trailing yield of 3.1% on the current share price of CN¥25.93. 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 Liaoning Chengda BiotechnologyLtd can afford its dividend, and if the dividend could grow.

View our latest analysis for Liaoning Chengda BiotechnologyLtd

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. Its dividend payout ratio is 79% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be concerned if earnings began to decline. 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. It paid out an unsustainably high 380% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how Liaoning Chengda BiotechnologyLtd intends to continue funding this dividend, or if it could be forced to cut the payment.

Liaoning Chengda BiotechnologyLtd 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.

Liaoning Chengda BiotechnologyLtd paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Liaoning Chengda BiotechnologyLtd to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit Liaoning Chengda BiotechnologyLtd paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're discomforted by Liaoning Chengda BiotechnologyLtd's 9.4% 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. Liaoning Chengda BiotechnologyLtd's dividend payments per share have declined at 11% per year on average over the past two years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

To Sum It Up

Has Liaoning Chengda BiotechnologyLtd got what it takes to maintain its dividend payments? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

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 Liaoning Chengda BiotechnologyLtd. To help with this, we've discovered 3 warning signs for Liaoning Chengda BiotechnologyLtd (1 makes us a bit uncomfortable!) that you ought to be aware of before buying the shares.

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