Why It Might Not Make Sense To Buy China Chemical & Pharmaceutical Co., Ltd. (TWSE:1701) For Its Upcoming Dividend

China Chemical & Pharmaceutical Co., Ltd. (TWSE:1701) stock is about to trade ex-dividend in three days. The ex-dividend date is one business day 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 takes at least two business day to settle. This means that investors who purchase China Chemical & Pharmaceutical's shares on or after the 25th of July will not receive the dividend, which will be paid on the 20th of August.

The company's next dividend payment will be NT$0.50 per share, and in the last 12 months, the company paid a total of NT$0.50 per share. Last year's total dividend payments show that China Chemical & Pharmaceutical has a trailing yield of 2.2% on the current share price of NT$22.30. If you buy this business for its dividend, you should have an idea of whether China Chemical & Pharmaceutical's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for China Chemical & Pharmaceutical

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. China Chemical & Pharmaceutical paid out a comfortable 45% of its profit last year. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. The company paid out 93% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

While China Chemical & Pharmaceutical'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 Chemical & Pharmaceutical to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit China Chemical & Pharmaceutical 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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's not ideal to see China Chemical & Pharmaceutical's earnings per share have been shrinking at 2.4% a year over the previous five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. It looks like the China Chemical & Pharmaceutical dividends are largely the same as they were 10 years ago. If a company's dividend stays flat while earnings are in decline, this is typically a sign that it is paying out a larger percentage of its earnings. This can become unsustainable if earnings fall far enough.

To Sum It Up

Is China Chemical & Pharmaceutical worth buying for its dividend? It's disappointing to see earnings per share declining, and this would ordinarily be enough to discourage us from most dividend stocks, even though China Chemical & Pharmaceutical is paying out less than half its income as dividends. However, it's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of China Chemical & Pharmaceutical.

Although, if you're still interested in China Chemical & Pharmaceutical and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 3 warning signs for China Chemical & Pharmaceutical (1 is concerning!) that deserve your attention before investing in the shares.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com