Dividend Investors: Don't Be Too Quick To Buy China MeiDong Auto Holdings Limited (HKG:1268) 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 China MeiDong Auto Holdings Limited (HKG:1268) is about to trade ex-dividend in the next four days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Accordingly, China MeiDong Auto Holdings investors that purchase the stock on or after the 20th of September will not receive the dividend, which will be paid on the 20th of December.

The company's next dividend payment will be CN¥0.0087 per share. Last year, in total, the company distributed CN¥0.20 to shareholders. Based on the last year's worth of payments, China MeiDong Auto Holdings stock has a trailing yield of around 4.6% on the current share price of HK$4.66. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether China MeiDong Auto Holdings can afford its dividend, and if the dividend could grow.

Check out our latest analysis for China MeiDong Auto Holdings

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. Its dividend payout ratio is 76% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be worried about the risk of a drop in earnings. 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. China MeiDong Auto Holdings paid out more free cash flow than it generated - 114%, 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.

China MeiDong Auto Holdings paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were China MeiDong Auto Holdings to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see China MeiDong Auto Holdings's earnings per share have dropped 8.6% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

China MeiDong Auto Holdings also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. 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. China MeiDong Auto Holdings has delivered 23% dividend growth per year on average over the past nine years. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

Final Takeaway

Has China MeiDong Auto Holdings got what it takes to maintain its dividend payments? China MeiDong Auto Holdings had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of China MeiDong Auto Holdings.

With that being said, if you're still considering China MeiDong Auto Holdings as an investment, you'll find it beneficial to know what risks this stock is facing. For example, we've found 4 warning signs for China MeiDong Auto Holdings that we recommend you consider before investing in the business.

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.

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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.