Why It Might Not Make Sense To Buy China Yongda Automobiles Services Holdings Limited (HKG:3669) For Its Upcoming Dividend

Readers hoping to buy China Yongda Automobiles Services Holdings Limited (HKG:3669) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is usually set to be one business day 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Thus, you can purchase China Yongda Automobiles Services Holdings' shares before the 11th of June in order to receive the dividend, which the company will pay on the 28th of June.

The company's next dividend payment will be CN¥0.052 per share, on the back of last year when the company paid a total of CN¥0.16 to shareholders. Last year's total dividend payments show that China Yongda Automobiles Services Holdings has a trailing yield of 8.9% on the current share price of HK$1.91. 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 investigate whether China Yongda Automobiles Services Holdings can afford its dividend, and if the dividend could grow.

Check out our latest analysis for China Yongda Automobiles Services 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. China Yongda Automobiles Services Holdings paid out more than half (53%) of its earnings last year, which is a regular payout ratio for most companies. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the past year it paid out 150% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

While China Yongda Automobiles Services Holdings'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. Cash is king, as they say, and were China Yongda Automobiles Services 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?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see China Yongda Automobiles Services Holdings's earnings per share have dropped 15% 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. China Yongda Automobiles Services Holdings has delivered an average of 2.7% per year annual increase in its dividend, based on the past 10 years of dividend payments. 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

From a dividend perspective, should investors buy or avoid China Yongda Automobiles Services Holdings? China Yongda Automobiles Services 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 Yongda Automobiles Services Holdings.

Although, if you're still interested in China Yongda Automobiles Services Holdings and want to know more, you'll find it very useful to know what risks this stock faces. Case in point: We've spotted 2 warning signs for China Yongda Automobiles Services Holdings you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.