Dividend Investors: Don't Be Too Quick To Buy Henan Zhongyuan Expressway Company Limited (SHSE:600020) For Its Upcoming Dividend

Henan Zhongyuan Expressway Company Limited (SHSE:600020) is about to trade ex-dividend in the next 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 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, Henan Zhongyuan Expressway investors that purchase the stock on or after the 28th of May will not receive the dividend, which will be paid on the 28th of May.

The company's upcoming dividend is CN¥0.149 a share, following on from the last 12 months, when the company distributed a total of CN¥0.15 per share to shareholders. Calculating the last year's worth of payments shows that Henan Zhongyuan Expressway has a trailing yield of 3.9% on the current share price of CN¥3.86. If you buy this business for its dividend, you should have an idea of whether Henan Zhongyuan Expressway's dividend is reliable and sustainable. So we need to investigate whether Henan Zhongyuan Expressway can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Henan Zhongyuan Expressway

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. Henan Zhongyuan Expressway paid out more than half (56%) of its earnings last year, which is a regular payout ratio for most companies. 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. Over the past year it paid out 169% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

While Henan Zhongyuan Expressway's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Henan Zhongyuan Expressway's ability to maintain its dividend.

Click here to see how much of its profit Henan Zhongyuan Expressway 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. With that in mind, we're encouraged by the steady growth at Henan Zhongyuan Expressway, with earnings per share up 4.0% on average 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.

We'd also point out that Henan Zhongyuan Expressway issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Henan Zhongyuan Expressway has lifted its dividend by approximately 4.1% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

The Bottom Line

Has Henan Zhongyuan Expressway got what it takes to maintain its dividend payments? Henan Zhongyuan Expressway is paying out a reasonable percentage of its income and an uncomfortably high 169% of its cash flow as dividends. At least earnings per share have been growing steadily. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Henan Zhongyuan Expressway.

With that in mind though, if the poor dividend characteristics of Henan Zhongyuan Expressway don't faze you, it's worth being mindful of the risks involved with this business. Every company has risks, and we've spotted 3 warning signs for Henan Zhongyuan Expressway (of which 2 don't sit too well with us!) you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.