It Might Not Be A Great Idea To Buy Gansu Guofang Industry & Trade (Group) Co., Ltd. (SHSE:601086) For Its Next Dividend

Gansu Guofang Industry & Trade (Group) Co., Ltd. (SHSE:601086) is about to trade ex-dividend in the next 2 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 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. In other words, investors can purchase Gansu Guofang Industry & Trade (Group)'s shares before the 20th of June in order to be eligible for the dividend, which will be paid on the 20th of June.

The company's next dividend payment will be CN¥0.18 per share, and in the last 12 months, the company paid a total of CN¥0.18 per share. Last year's total dividend payments show that Gansu Guofang Industry & Trade (Group) has a trailing yield of 4.4% on the current share price of CN¥4.08. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Gansu Guofang Industry & Trade (Group) can afford its dividend, and if the dividend could grow.

View our latest analysis for Gansu Guofang Industry & Trade (Group)

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Gansu Guofang Industry & Trade (Group) distributed an unsustainably high 112% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether Gansu Guofang Industry & Trade (Group) generated enough free cash flow to afford its dividend. Fortunately, it paid out only 27% of its free cash flow in the past year.

It's good to see that while Gansu Guofang Industry & Trade (Group)'s dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit Gansu Guofang Industry & Trade (Group) 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. Readers will understand then, why we're concerned to see Gansu Guofang Industry & Trade (Group)'s earnings per share have dropped 5.2% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, six years ago, Gansu Guofang Industry & Trade (Group) has lifted its dividend by approximately 10% 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. Gansu Guofang Industry & Trade (Group) is already paying out 112% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

From a dividend perspective, should investors buy or avoid Gansu Guofang Industry & Trade (Group)? It's never great to see earnings per share declining, especially when a company is paying out 112% of its profit as dividends, which we feel is uncomfortably high. 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 Gansu Guofang Industry & Trade (Group) is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Gansu Guofang Industry & Trade (Group) and want to know more, you'll find it very useful to know what risks this stock faces. In terms of investment risks, we've identified 3 warning signs with Gansu Guofang Industry & Trade (Group) and understanding them should be part of your investment process.

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