Is It Smart To Buy Chengdu Zhimingda Electronics Co., Ltd. (SHSE:688636) Before It Goes Ex-Dividend?

Chengdu Zhimingda Electronics Co., Ltd. (SHSE:688636) stock is about to trade ex-dividend in 3 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Thus, you can purchase Chengdu Zhimingda Electronics' shares before the 10th of May in order to receive the dividend, which the company will pay on the 10th of May.

The company's next dividend payment will be CN¥0.21 per share, on the back of last year when the company paid a total of CN¥0.21 to shareholders. Based on the last year's worth of payments, Chengdu Zhimingda Electronics has a trailing yield of 0.6% on the current stock price of CN¥36.50. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Chengdu Zhimingda Electronics

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Chengdu Zhimingda Electronics is paying out just 20% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. Chengdu Zhimingda Electronics paid a dividend despite reporting negative free cash flow over the last twelve months. This may be due to heavy investment in the business, but this is still suboptimal from a dividend sustainability perspective.

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

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings fall far enough, the company could be forced to cut its dividend. That explains why we're not overly excited about Chengdu Zhimingda Electronics's flat earnings over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Chengdu Zhimingda Electronics has delivered an average of 12% per year annual increase in its dividend, based on the past two years of dividend payments.

Final Takeaway

From a dividend perspective, should investors buy or avoid Chengdu Zhimingda Electronics? Chengdu Zhimingda Electronics has seen its earnings per share stagnate in recent years, although the company reinvests more than half of its profits in the business, which could bode well for its future prospects. Overall, Chengdu Zhimingda Electronics looks like a promising dividend stock in this analysis, and we think it would be worth investigating further.

On that note, you'll want to research what risks Chengdu Zhimingda Electronics is facing. Every company has risks, and we've spotted 1 warning sign for Chengdu Zhimingda Electronics you should know about.

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.