Income Investors Should Know That Nongfu Spring Co., Ltd. (HKG:9633) Goes Ex-Dividend Soon

Nongfu Spring Co., Ltd. (HKG:9633) stock is about to trade ex-dividend in couple of days. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase Nongfu Spring's shares before the 22nd of May to receive the dividend, which will be paid on the 27th of August.

The company's upcoming dividend is CN¥0.76 a share, following on from the last 12 months, when the company distributed a total of CN¥0.76 per share to shareholders. Based on the last year's worth of payments, Nongfu Spring stock has a trailing yield of around 2.1% on the current share price of HK$38.50. If you buy this business for its dividend, you should have an idea of whether Nongfu Spring's dividend is reliable and sustainable. So we need to investigate whether Nongfu Spring can afford its dividend, and if the dividend could grow.

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Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Nongfu Spring is paying out an acceptable 70% of its profit, a common payout level among most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Nongfu Spring paid out more free cash flow than it generated - 183%, to be precise - last year, which we think is concerningly 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 Nongfu Spring'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 Nongfu Spring's ability to maintain its dividend.

Check out our latest analysis for Nongfu Spring

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

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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. For this reason, we're glad to see Nongfu Spring's earnings per share have risen 19% per annum over the last five years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Nongfu Spring has delivered an average of 45% per year annual increase in its dividend, based on the past four years of dividend payments. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

The Bottom Line

Has Nongfu Spring got what it takes to maintain its dividend payments? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note Nongfu Spring paid out a much higher percentage of its free cash flow, which makes us uncomfortable. In summary, while it has some positive characteristics, we're not inclined to race out and buy Nongfu Spring today.

With that being said, if dividends aren't your biggest concern with Nongfu Spring, you should know about the other risks facing this business. Every company has risks, and we've spotted 1 warning sign for Nongfu Spring you should know about.

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.