Don't Race Out To Buy Shenzhen Zhilai Sci and Tech Co., Ltd. (SZSE:300771) Just Because It's Going Ex-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 Shenzhen Zhilai Sci and Tech Co., Ltd. (SZSE:300771) is about to go ex-dividend in just 3 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase Shenzhen Zhilai Sci and Tech's shares on or after the 13th of June will not receive the dividend, which will be paid on the 13th of June.

The company's next dividend payment will be CN¥0.100001 per share, on the back of last year when the company paid a total of CN¥0.10 to shareholders. Last year's total dividend payments show that Shenzhen Zhilai Sci and Tech has a trailing yield of 1.2% on the current share price of CN¥8.30. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Shenzhen Zhilai Sci and Tech

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. Shenzhen Zhilai Sci and Tech paid out 58% of its earnings to investors last year, a normal payout level for most businesses. 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. Shenzhen Zhilai Sci and Tech paid out more free cash flow than it generated - 118%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Shenzhen Zhilai Sci and Tech 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.

Shenzhen Zhilai Sci and Tech paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Shenzhen Zhilai Sci and Tech's ability to maintain its dividend.

Click here to see how much of its profit Shenzhen Zhilai Sci and Tech paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Shenzhen Zhilai Sci and Tech's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 31% a year over the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Shenzhen Zhilai Sci and Tech's dividend payments per share have declined at 17% per year on average over the past five years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

The Bottom Line

From a dividend perspective, should investors buy or avoid Shenzhen Zhilai Sci and Tech? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Shenzhen Zhilai Sci and Tech.

So if you're still interested in Shenzhen Zhilai Sci and Tech despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example, we've found 5 warning signs for Shenzhen Zhilai Sci and Tech (2 don't sit too well with us!) that deserve your attention before investing in the shares.

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.