Don't Buy Wenling Zhejiang Measuring and Cutting Tools Trading Centre Company Limited (HKG:1379) For Its Next Dividend Without Doing These Checks

Wenling Zhejiang Measuring and Cutting Tools Trading Centre Company Limited (HKG:1379) is about to trade ex-dividend in the next two days. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a 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. Therefore, if you purchase Wenling Zhejiang Measuring and Cutting Tools Trading Centre's shares on or after the 6th of May, you won't be eligible to receive the dividend, when it is paid on the 30th of May.

The company's next dividend payment will be CN¥0.23 per share, and in the last 12 months, the company paid a total of CN¥0.23 per share. Based on the last year's worth of payments, Wenling Zhejiang Measuring and Cutting Tools Trading Centre stock has a trailing yield of around 9.4% on the current share price of HK$2.61. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

Our free stock report includes 4 warning signs investors should be aware of before investing in Wenling Zhejiang Measuring and Cutting Tools Trading Centre. Read for free now.

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. Wenling Zhejiang Measuring and Cutting Tools Trading Centre distributed an unsustainably high 122% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether Wenling Zhejiang Measuring and Cutting Tools Trading Centre generated enough free cash flow to afford its dividend. It paid out more than half (59%) of its free cash flow in the past year, which is within an average range for most companies.

It's good to see that while Wenling Zhejiang Measuring and Cutting Tools Trading Centre's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Check out our latest analysis for Wenling Zhejiang Measuring and Cutting Tools Trading Centre

Click here to see how much of its profit Wenling Zhejiang Measuring and Cutting Tools Trading Centre 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 fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Wenling Zhejiang Measuring and Cutting Tools Trading Centre's earnings per share have dropped 19% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Wenling Zhejiang Measuring and Cutting Tools Trading Centre has seen its dividend decline 10% per annum on average over the past three years, which is not great to see. 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.

To Sum It Up

Is Wenling Zhejiang Measuring and Cutting Tools Trading Centre worth buying for its dividend? Earnings per share have been in decline, which is not encouraging. Additionally, Wenling Zhejiang Measuring and Cutting Tools Trading Centre 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: Wenling Zhejiang Measuring and Cutting Tools Trading Centre has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Although, if you're still interested in Wenling Zhejiang Measuring and Cutting Tools Trading Centre and want to know more, you'll find it very useful to know what risks this stock faces. Every company has risks, and we've spotted 4 warning signs for Wenling Zhejiang Measuring and Cutting Tools Trading Centre (of which 1 is concerning!) 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.