Don't Buy Yangtzekiang Garment Limited (HKG:294) 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 Yangtzekiang Garment Limited (HKG:294) is about to trade ex-dividend in the next 4 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. 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 Yangtzekiang Garment's shares before the 27th of September in order to be eligible for the dividend, which will be paid on the 16th of October.

The company's next dividend payment will be HK$0.02 per share, on the back of last year when the company paid a total of HK$0.02 to shareholders. Looking at the last 12 months of distributions, Yangtzekiang Garment has a trailing yield of approximately 1.7% on its current stock price of HK$1.16. 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 check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Yangtzekiang Garment

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. Yangtzekiang Garment reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If Yangtzekiang Garment didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Luckily it paid out just 6.3% of its free cash flow last year.

Click here to see how much of its profit Yangtzekiang Garment paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Yangtzekiang Garment was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Yangtzekiang Garment's dividend payments per share have declined at 8.8% per year on average over the past 10 years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

Remember, you can always get a snapshot of Yangtzekiang Garment's financial health, by checking our visualisation of its financial health, here.

To Sum It Up

Is Yangtzekiang Garment an attractive dividend stock, or better left on the shelf? It's hard to get used to Yangtzekiang Garment paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Yangtzekiang Garment. For example, we've found 2 warning signs for Yangtzekiang Garment (1 is significant!) that deserve your attention before investing in the shares.

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.