Dividend Investors: Don't Be Too Quick To Buy China Electric Mfg. Corporation (TWSE:1611) For Its Upcoming Dividend

Readers hoping to buy China Electric Mfg. Corporation (TWSE:1611) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is commonly two business days before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. This means that investors who purchase China Electric Mfg's shares on or after the 26th of March will not receive the dividend, which will be paid on the 24th of April.

The company's next dividend payment will be NT$0.80 per share. Last year, in total, the company distributed NT$0.50 to shareholders. Looking at the last 12 months of distributions, China Electric Mfg has a trailing yield of approximately 3.0% on its current stock price of NT$16.50. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

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If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year, China Electric Mfg paid out 96% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. Over the last year, it paid out more than three-quarters (78%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's good to see that while China Electric Mfg's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

Check out our latest analysis for China Electric Mfg

Click here to see how much of its profit China Electric Mfg paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. 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 Electric Mfg's earnings per share have dropped 27% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. China Electric Mfg's dividend payments per share have declined at 12% per year on average over the past seven years, which is uninspiring. 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.

The Bottom Line

From a dividend perspective, should investors buy or avoid China Electric Mfg? Earnings per share have been in decline, which is not encouraging. Additionally, China Electric Mfg 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. It's not that we think China Electric Mfg is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in China Electric Mfg despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. We've identified 2 warning signs with China Electric Mfg (at least 1 which is concerning), and understanding them should be part of your investment process.

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.