Don't Race Out To Buy Liqun Commercial Group Co.,Ltd. (SHSE:601366) Just Because It's Going Ex-Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Liqun Commercial Group Co.,Ltd. (SHSE:601366) is about to go ex-dividend in just four 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 because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Meaning, you will need to purchase Liqun Commercial GroupLtd's shares before the 11th of June to receive the dividend, which will be paid on the 11th of June.

The company's upcoming dividend is CN¥0.03 a share, following on from the last 12 months, when the company distributed a total of CN¥0.03 per share to shareholders. Looking at the last 12 months of distributions, Liqun Commercial GroupLtd has a trailing yield of approximately 0.6% on its current stock price of CN¥4.70. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Liqun Commercial GroupLtd

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. Liqun Commercial GroupLtd paid out 139% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Fortunately, it paid out only 31% of its free cash flow in the past year.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Liqun Commercial GroupLtd fortunately did generate enough cash to fund its dividend. 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 Liqun Commercial GroupLtd paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Liqun Commercial GroupLtd's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 35% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Liqun Commercial GroupLtd has seen its dividend decline 16% per annum on average over the past seven years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

To Sum It Up

Is Liqun Commercial GroupLtd worth buying for its dividend? It's not a great combination to see a company with earnings in decline and paying out 139% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Liqun Commercial GroupLtd's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that being said, if you're still considering Liqun Commercial GroupLtd as an investment, you'll find it beneficial to know what risks this stock is facing. We've identified 3 warning signs with Liqun Commercial GroupLtd (at least 2 which are a bit unpleasant), and understanding these should be part of your investment process.

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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.