Don't Buy Dnake (Xiamen) Intelligent Technology Co., Ltd. (SZSE:300884) For Its Next Dividend Without Doing These Checks

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Dnake (Xiamen) Intelligent Technology Co., Ltd. (SZSE:300884) is about to trade ex-dividend in the next 2 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. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase Dnake (Xiamen) Intelligent Technology's shares before the 12th of September in order to be eligible for the dividend, which will be paid on the 12th of September.

The company's next dividend payment will be CN¥0.10 per share. Last year, in total, the company distributed CN¥0.30 to shareholders. Based on the last year's worth of payments, Dnake (Xiamen) Intelligent Technology has a trailing yield of 3.4% on the current stock price of CN¥8.77. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Dnake (Xiamen) Intelligent Technology

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year, Dnake (Xiamen) Intelligent Technology paid out 96% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. It paid out an unsustainably high 499% of its free cash flow as dividends over the past 12 months, which is worrying. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.

Dnake (Xiamen) Intelligent Technology 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.

As Dnake (Xiamen) Intelligent Technology's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see how much of its profit Dnake (Xiamen) Intelligent Technology paid out over the last 12 months.

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That explains why we're not overly excited about Dnake (Xiamen) Intelligent Technology's flat earnings over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Dnake (Xiamen) Intelligent Technology has delivered an average of 47% per year annual increase in its dividend, based on the past three years of dividend payments.

The Bottom Line

Should investors buy Dnake (Xiamen) Intelligent Technology for the upcoming dividend? It's been unable to generate earnings growth, yet is paying out an uncomfortably high percentage of both its profits (96%) and cash flow (499%) as dividends. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that in mind though, if the poor dividend characteristics of Dnake (Xiamen) Intelligent Technology don't faze you, it's worth being mindful of the risks involved with this business. For example, we've found 1 warning sign for Dnake (Xiamen) Intelligent Technology that we recommend you consider before investing in the business.

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.