Here's Why We're Wary Of Buying Xiabuxiabu Catering Management (China) Holdings' (HKG:520) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Xiabuxiabu Catering Management (China) Holdings Co., Ltd. (HKG:520) is about to trade ex-dividend in the next 3 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase Xiabuxiabu Catering Management (China) Holdings' shares on or after the 5th of October will not receive the dividend, which will be paid on the 20th of October.

The company's next dividend payment will be CN¥0.028 per share, on the back of last year when the company paid a total of CN¥0.056 to shareholders. Based on the last year's worth of payments, Xiabuxiabu Catering Management (China) Holdings has a trailing yield of 1.8% on the current stock price of HK$3.3. If you buy this business for its dividend, you should have an idea of whether Xiabuxiabu Catering Management (China) Holdings's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Xiabuxiabu Catering Management (China) Holdings

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. Xiabuxiabu Catering Management (China) Holdings paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. The good news is it paid out just 12% of its free cash flow in the last year.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Xiabuxiabu Catering Management (China) Holdings reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Xiabuxiabu Catering Management (China) Holdings has seen its dividend decline 6.3% per annum on average over the past eight years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

Get our latest analysis on Xiabuxiabu Catering Management (China) Holdings's balance sheet health here.

Final Takeaway

Should investors buy Xiabuxiabu Catering Management (China) Holdings for the upcoming dividend? We're a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. Bottom line: Xiabuxiabu Catering Management (China) Holdings has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Curious what other investors think of Xiabuxiabu Catering Management (China) Holdings? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

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.