Why It Might Not Make Sense To Buy Zhuhai Raysharp Technology Co.,Ltd. (SZSE:301042) For Its Upcoming 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 Zhuhai Raysharp Technology Co.,Ltd. (SZSE:301042) is about to go ex-dividend in just three days. 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. Therefore, if you purchase Zhuhai Raysharp TechnologyLtd's shares on or after the 27th of May, you won't be eligible to receive the dividend, when it is paid on the 27th of May.

The company's next dividend payment will be CN¥1.20 per share, on the back of last year when the company paid a total of CN¥1.20 to shareholders. Calculating the last year's worth of payments shows that Zhuhai Raysharp TechnologyLtd has a trailing yield of 3.4% on the current share price of CN¥35.82. If you buy this business for its dividend, you should have an idea of whether Zhuhai Raysharp TechnologyLtd's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Zhuhai Raysharp TechnologyLtd

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. Its dividend payout ratio is 82% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be worried about the risk of a drop in earnings. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the past year it paid out 190% of its free cash flow as dividends, which is uncomfortably 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.

Zhuhai Raysharp TechnologyLtd 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.

Zhuhai Raysharp TechnologyLtd 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 Zhuhai Raysharp TechnologyLtd 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 Zhuhai Raysharp TechnologyLtd paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Zhuhai Raysharp TechnologyLtd earnings per share are up 3.1% 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.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Zhuhai Raysharp TechnologyLtd has seen its dividend decline 9.1% per annum on average over the past three 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.

Final Takeaway

Has Zhuhai Raysharp TechnologyLtd got what it takes to maintain its dividend payments? Zhuhai Raysharp TechnologyLtd is paying out a reasonable percentage of its income and an uncomfortably high 190% of its cash flow as dividends. At least earnings per share have been growing steadily. Bottom line: Zhuhai Raysharp TechnologyLtd has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of Zhuhai Raysharp TechnologyLtd don't faze you, it's worth being mindful of the risks involved with this business. For example, we've found 2 warning signs for Zhuhai Raysharp TechnologyLtd that we recommend you consider before investing in the business.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.