Don't Race Out To Buy Shanghai Xujiahui Commercial Co., Ltd. (SZSE:002561) Just Because It's Going Ex-Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Shanghai Xujiahui Commercial Co., Ltd. (SZSE:002561) is about to trade ex-dividend in the next three 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. In other words, investors can purchase Shanghai Xujiahui Commercial's shares before the 14th of May in order to be eligible for the dividend, which will be paid on the 14th of May.

The company's upcoming dividend is CN¥0.12 a share, following on from the last 12 months, when the company distributed a total of CN¥0.12 per share to shareholders. Based on the last year's worth of payments, Shanghai Xujiahui Commercial stock has a trailing yield of around 1.4% on the current share price of CN¥8.33. 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.

Check out our latest analysis for Shanghai Xujiahui Commercial

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Shanghai Xujiahui Commercial paid out 74% of its earnings to investors last year, a normal payout level for most businesses. 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. Over the last year, it paid out more than three-quarters (78%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Shanghai Xujiahui Commercial's earnings per share have fallen at approximately 22% a year over the previous 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. Shanghai Xujiahui Commercial's dividend payments per share have declined at 10% per year on average over the past 10 years, which is uninspiring. 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.

The Bottom Line

Is Shanghai Xujiahui Commercial worth buying for its dividend? It's never good to see earnings per share shrinking, but at least the dividend payout ratios appear reasonable. We're aware though that if earnings continue to decline, the dividend could be at risk. Bottom line: Shanghai Xujiahui Commercial has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of Shanghai Xujiahui Commercial don't faze you, it's worth being mindful of the risks involved with this business. We've identified 3 warning signs with Shanghai Xujiahui Commercial (at least 1 which makes us a bit uncomfortable), and understanding these 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.