Don't Buy Shanghai Allied Industrial Co., Ltd (SZSE:301419) For Its Next Dividend Without Doing These Checks

Readers hoping to buy Shanghai Allied Industrial Co., Ltd (SZSE:301419) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. In other words, investors can purchase Shanghai Allied Industrial's shares before the 30th of May in order to be eligible for the dividend, which will be paid on the 30th of May.

The company's next dividend payment will be CN¥0.50 per share, on the back of last year when the company paid a total of CN¥0.50 to shareholders. Based on the last year's worth of payments, Shanghai Allied Industrial stock has a trailing yield of around 1.8% on the current share price of CN¥28.03. 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 investigate whether Shanghai Allied Industrial can afford its dividend, and if the dividend could grow.

See our latest analysis for Shanghai Allied Industrial

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. Last year Shanghai Allied Industrial paid out 98% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Dividends consumed 56% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's good to see that while Shanghai Allied Industrial's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

Click here to see how much of its profit Shanghai Allied Industrial paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see Shanghai Allied Industrial's earnings per share have dropped 5.6% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Given that Shanghai Allied Industrial has only been paying a dividend for a year, there's not much of a past history to draw insight from.

The Bottom Line

Is Shanghai Allied Industrial worth buying for its dividend? Earnings per share have been in decline, which is not encouraging. Additionally, Shanghai Allied Industrial is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. Bottom line: Shanghai Allied Industrial has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

So if you're still interested in Shanghai Allied Industrial despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example - Shanghai Allied Industrial has 2 warning signs we think you should be aware of.

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.