Why It Might Not Make Sense To Buy Yes Optoelectronics (Group) Co., Ltd. (SZSE:002952) For Its Upcoming Dividend

Readers hoping to buy Yes Optoelectronics (Group) Co., Ltd. (SZSE:002952) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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 important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Accordingly, Yes Optoelectronics (Group) investors that purchase the stock on or after the 31st of May will not receive the dividend, which will be paid on the 31st of May.

The company's upcoming dividend is CN¥0.08 a share, following on from the last 12 months, when the company distributed a total of CN¥0.40 per share to shareholders. Last year's total dividend payments show that Yes Optoelectronics (Group) has a trailing yield of 1.7% on the current share price of CN¥24.11. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Yes Optoelectronics (Group) has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Yes Optoelectronics (Group)

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. Yes Optoelectronics (Group) paid out 118% 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. Dividends consumed 58% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Yes Optoelectronics (Group) 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. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Yes Optoelectronics (Group) paid out over the last 12 months.

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. With that in mind, we're discomforted by Yes Optoelectronics (Group)'s 7.9% per annum decline in earnings in the past 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 five years, Yes Optoelectronics (Group) has increased its dividend at approximately 5.8% 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. Yes Optoelectronics (Group) is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

The Bottom Line

Has Yes Optoelectronics (Group) got what it takes to maintain its dividend payments? It's never fun to see a company's earnings per share in retreat. What's more, Yes Optoelectronics (Group) is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. Bottom line: Yes Optoelectronics (Group) has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Yes Optoelectronics (Group). Be aware that Yes Optoelectronics (Group) is showing 5 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

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.