Shanghai Kaibao PharmaceuticalLtd (SZSE:300039) Could Be A Buy For Its Upcoming Dividend

Shanghai Kaibao Pharmaceutical CO.,Ltd (SZSE:300039) is about to trade ex-dividend in the next 2 days. 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. Meaning, you will need to purchase Shanghai Kaibao PharmaceuticalLtd's shares before the 19th of June to receive the dividend, which will be paid on the 19th of June.

The company's next dividend payment will be CN¥0.10 per share. Last year, in total, the company distributed CN¥0.10 to shareholders. Based on the last year's worth of payments, Shanghai Kaibao PharmaceuticalLtd stock has a trailing yield of around 1.8% on the current share price of CN¥5.67. 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.

View our latest analysis for Shanghai Kaibao PharmaceuticalLtd

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. That's why it's good to see Shanghai Kaibao PharmaceuticalLtd paying out a modest 31% of its earnings. 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. The good news is it paid out just 18% of its free cash flow in the last year.

It's positive to see that Shanghai Kaibao PharmaceuticalLtd'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 Shanghai Kaibao PharmaceuticalLtd paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. 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 encouraged by the steady growth at Shanghai Kaibao PharmaceuticalLtd, with earnings per share up 8.5% on average over the last five years. The company is retaining more than half of its earnings within the business, and it has been growing earnings at a decent rate. Organisations that reinvest heavily in themselves typically get stronger over time, which can bring attractive benefits such as stronger earnings and dividends.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Shanghai Kaibao PharmaceuticalLtd's dividend payments per share have declined at 2.5% per year on average over the past 10 years, which is uninspiring. It's unusual to see earnings per share increasing at the same time as dividends per share have been in decline. We'd hope it's because the company is reinvesting heavily in its business, but it could also suggest business is lumpy.

To Sum It Up

From a dividend perspective, should investors buy or avoid Shanghai Kaibao PharmaceuticalLtd? Earnings per share growth has been growing somewhat, and Shanghai Kaibao PharmaceuticalLtd 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. It might be nice to see earnings growing faster, but Shanghai Kaibao PharmaceuticalLtd is being conservative with its dividend payouts and could still perform reasonably over the long run. There's a lot to like about Shanghai Kaibao PharmaceuticalLtd, and we would prioritise taking a closer look at it.

In light of that, while Shanghai Kaibao PharmaceuticalLtd has an appealing dividend, it's worth knowing the risks involved with this stock. Our analysis shows 1 warning sign for Shanghai Kaibao PharmaceuticalLtd and you should be aware of this before buying any 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