There's A Lot To Like About Chengdu Kanghong Pharmaceutical Group's (SZSE:002773) Upcoming CN¥0.38 Dividend

Chengdu Kanghong Pharmaceutical Group Co., Ltd (SZSE:002773) is about to trade ex-dividend in the next 3 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. This means that investors who purchase Chengdu Kanghong Pharmaceutical Group's shares on or after the 28th of May will not receive the dividend, which will be paid on the 28th of May.

The company's upcoming dividend is CN¥0.38 a share, following on from the last 12 months, when the company distributed a total of CN¥0.38 per share to shareholders. Based on the last year's worth of payments, Chengdu Kanghong Pharmaceutical Group has a trailing yield of 1.7% on the current stock price of CN¥22.61. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Chengdu Kanghong Pharmaceutical Group

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately Chengdu Kanghong Pharmaceutical Group's payout ratio is modest, at just 30% of profit. 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. What's good is that dividends were well covered by free cash flow, with the company paying out 11% of its cash flow last year.

It's positive to see that Chengdu Kanghong Pharmaceutical Group's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see how much of its profit Chengdu Kanghong Pharmaceutical Group paid out over the last 12 months.

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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Chengdu Kanghong Pharmaceutical Group, with earnings per share up 9.1% on average over the last five years. Management have been reinvested more than half of the company's earnings within the business, and the company has been able to grow earnings with this retained capital. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.

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, Chengdu Kanghong Pharmaceutical Group has lifted its dividend by approximately 18% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Is Chengdu Kanghong Pharmaceutical Group worth buying for its dividend? Earnings per share growth has been growing somewhat, and Chengdu Kanghong Pharmaceutical Group is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Chengdu Kanghong Pharmaceutical Group is halfway there. Overall we think this is an attractive combination and worthy of further research.

On that note, you'll want to research what risks Chengdu Kanghong Pharmaceutical Group is facing. In terms of investment risks, we've identified 1 warning sign with Chengdu Kanghong Pharmaceutical Group and understanding them should be part of your investment process.

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.