It Might Not Be A Great Idea To Buy Beijing Labtech Instruments Co., Ltd. (SHSE:688056) For Its Next 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 Beijing Labtech Instruments Co., Ltd. (SHSE:688056) is about to go ex-dividend in just 2 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. Thus, you can purchase Beijing Labtech Instruments' shares before the 14th of June in order to receive the dividend, which the company will pay on the 14th of June.

The company's next dividend payment will be CN¥0.80 per share, and in the last 12 months, the company paid a total of CN¥0.80 per share. Based on the last year's worth of payments, Beijing Labtech Instruments stock has a trailing yield of around 3.6% on the current share price of CN¥22.18. 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 Beijing Labtech Instruments can afford its dividend, and if the dividend could grow.

View our latest analysis for Beijing Labtech Instruments

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Beijing Labtech Instruments paid out a disturbingly high 205% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. 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. Fortunately, it paid out only 38% 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 Beijing Labtech Instruments fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Beijing Labtech Instruments's earnings per share have fallen at approximately 20% a year over the previous 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. In the past three years, Beijing Labtech Instruments has increased its dividend at approximately 39% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Beijing Labtech Instruments is already paying out 205% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

Is Beijing Labtech Instruments an attractive dividend stock, or better left on the shelf? It's not a great combination to see a company with earnings in decline and paying out 205% 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 Beijing Labtech Instruments's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that being said, if you're still considering Beijing Labtech Instruments as an investment, you'll find it beneficial to know what risks this stock is facing. For example, Beijing Labtech Instruments has 2 warning signs (and 1 which is potentially serious) we think you should know about.

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.