Do These 3 Checks Before Buying Wuhan Ligong Guangke Co., Ltd. (SZSE:300557) 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 Wuhan Ligong Guangke Co., Ltd. (SZSE:300557) 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 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, Wuhan Ligong Guangke investors that purchase the stock on or after the 17th of May will not receive the dividend, which will be paid on the 17th of May.

The company's next dividend payment will be CN¥0.20 per share, on the back of last year when the company paid a total of CN¥0.20 to shareholders. Based on the last year's worth of payments, Wuhan Ligong Guangke stock has a trailing yield of around 0.7% on the current share price of CN¥29.44. 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 check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Wuhan Ligong Guangke

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. Wuhan Ligong Guangke paid out 51% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Wuhan Ligong Guangke generated enough free cash flow to afford its dividend. It paid out an unsustainably high 204% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since Wuhan Ligong Guangke is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

Wuhan Ligong Guangke 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.

Wuhan Ligong Guangke paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Wuhan Ligong Guangke to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit Wuhan Ligong Guangke paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see Wuhan Ligong Guangke earnings per share are up 4.0% per annum over the last five years. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Wuhan Ligong Guangke has seen its dividend decline 9.4% per annum on average over the past seven years, which is not great to see. It's unusual to see earnings per share increasing at the same time as dividends per share have been in decline. We'd hope it's because the company is reinvesting heavily in its business, but it could also suggest business is lumpy.

To Sum It Up

Is Wuhan Ligong Guangke worth buying for its dividend? Wuhan Ligong Guangke is paying out a reasonable percentage of its income and an uncomfortably high 204% of its cash flow as dividends. At least earnings per share have been growing steadily. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

So if you're still interested in Wuhan Ligong Guangke despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. In terms of investment risks, we've identified 2 warning signs with Wuhan Ligong Guangke and understanding them should be part of your investment process.

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.