Sichuan Yahua Industrial Group Co., Ltd. (SZSE:002497) is about to trade ex-dividend in the next 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. Therefore, if you purchase Sichuan Yahua Industrial Group's shares on or after the 28th of June, you won't be eligible to receive the dividend, when it is paid on the 28th of June.

The company's upcoming dividend is CN¥0.035 a share, following on from the last 12 months, when the company distributed a total of CN¥0.035 per share to shareholders. Last year's total dividend payments show that Sichuan Yahua Industrial Group has a trailing yield of 0.4% on the current share price of CN¥9.20. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Sichuan Yahua Industrial Group can afford its dividend, and if the dividend could grow.

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Sichuan Yahua Industrial Group paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Sichuan Yahua Industrial Group paid out more free cash flow than it generated - 115%, 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.

Sichuan Yahua Industrial Group 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.

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

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Sichuan Yahua Industrial Group was unprofitable last year, but at least the general trend suggests its earnings have been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Sichuan Yahua Industrial Group's dividend payments per share have declined at 12% per year on average over the past 10 years, which is uninspiring.

Get our latest analysis on Sichuan Yahua Industrial Group's balance sheet health here.

The Bottom Line

Should investors buy Sichuan Yahua Industrial Group for the upcoming dividend? We're a bit uncomfortable with it paying a dividend while being loss-making, especially given that the dividend was not well covered by free cash flow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Ever wonder what the future holds for Sichuan Yahua Industrial Group? See what the four analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.

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