Don't Buy Kung Long Batteries Industrial Co.,Ltd (TWSE:1537) For Its Next Dividend Without Doing These Checks

Kung Long Batteries Industrial Co.,Ltd (TWSE:1537) is about to trade ex-dividend in the next four 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. Therefore, if you purchase Kung Long Batteries IndustrialLtd's shares on or after the 21st of August, you won't be eligible to receive the dividend, when it is paid on the 10th of September.

The company's next dividend payment will be NT$7.00 per share, on the back of last year when the company paid a total of NT$7.00 to shareholders. Looking at the last 12 months of distributions, Kung Long Batteries IndustrialLtd has a trailing yield of approximately 4.8% on its current stock price of NT$147.00. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Kung Long Batteries IndustrialLtd

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. It paid out 82% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. A useful secondary check can be to evaluate whether Kung Long Batteries IndustrialLtd generated enough free cash flow to afford its dividend. It paid out 103% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

Kung Long Batteries IndustrialLtd does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

Kung Long Batteries IndustrialLtd paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Kung Long Batteries IndustrialLtd's ability to maintain its dividend.

Click here to see how much of its profit Kung Long Batteries IndustrialLtd paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see Kung Long Batteries IndustrialLtd's earnings per share have dropped 6.8% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Kung Long Batteries IndustrialLtd has delivered 2.4% dividend growth per year on average over the past 10 years. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Kung Long Batteries IndustrialLtd is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

Has Kung Long Batteries IndustrialLtd got what it takes to maintain its dividend payments? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. Bottom line: Kung Long Batteries IndustrialLtd has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering Kung Long Batteries IndustrialLtd as an investment, you'll find it beneficial to know what risks this stock is facing. For example, Kung Long Batteries IndustrialLtd has 2 warning signs (and 1 which is potentially serious) we think 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.