Do These 3 Checks Before Buying Guangdong Fenghua Advanced Technology (Holding) Co., Ltd. (SZSE:000636) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Guangdong Fenghua Advanced Technology (Holding) Co., Ltd. (SZSE:000636) is about to trade ex-dividend in the next three days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. In other words, investors can purchase Guangdong Fenghua Advanced Technology (Holding)'s shares before the 5th of July in order to be eligible for the dividend, which will be paid on the 5th of July.

The company's next dividend payment will be CN¥0.05 per share, on the back of last year when the company paid a total of CN¥0.05 to shareholders. Calculating the last year's worth of payments shows that Guangdong Fenghua Advanced Technology (Holding) has a trailing yield of 0.4% on the current share price of CN¥12.71. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Guangdong Fenghua Advanced Technology (Holding)

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. That's why it's good to see Guangdong Fenghua Advanced Technology (Holding) paying out a modest 31% of its earnings. A useful secondary check can be to evaluate whether Guangdong Fenghua Advanced Technology (Holding) generated enough free cash flow to afford its dividend. It paid out an unsustainably high 231% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how Guangdong Fenghua Advanced Technology (Holding) intends to continue funding this dividend, or if it could be forced to cut the payment.

Guangdong Fenghua Advanced Technology (Holding) does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

While Guangdong Fenghua Advanced Technology (Holding)'s dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Guangdong Fenghua Advanced Technology (Holding) to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Guangdong Fenghua Advanced Technology (Holding)'s earnings per share have plummeted approximately 32% a year over the previous five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Guangdong Fenghua Advanced Technology (Holding) has lifted its dividend by approximately 5.2% a year on average.

To Sum It Up

Is Guangdong Fenghua Advanced Technology (Holding) an attractive dividend stock, or better left on the shelf? It's disappointing to see earnings per share declining, and this would ordinarily be enough to discourage us from most dividend stocks, even though Guangdong Fenghua Advanced Technology (Holding) is paying out less than half its income as dividends. However, it's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. Bottom line: Guangdong Fenghua Advanced Technology (Holding) has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Wondering what the future holds for Guangdong Fenghua Advanced Technology (Holding)? See what the three analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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