Readers hoping to buy Henan Lantian Gas Co.,Ltd. (SHSE:605368) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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. Meaning, you will need to purchase Henan Lantian GasLtd's shares before the 20th of September to receive the dividend, which will be paid on the 20th of September.

The company's next dividend payment will be CN¥0.45 per share, and in the last 12 months, the company paid a total of CN¥0.90 per share. Based on the last year's worth of payments, Henan Lantian GasLtd has a trailing yield of 6.9% on the current stock price of CN¥13.03. If you buy this business for its dividend, you should have an idea of whether Henan Lantian GasLtd's dividend is reliable and sustainable. As a result, readers should always check whether Henan Lantian GasLtd has been able to grow its dividends, or if the dividend might be cut.

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. Henan Lantian GasLtd paid out 148% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. 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 past year it paid out 155% of its free cash flow as dividends, which is uncomfortably 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.

Cash is slightly more important than profit from a dividend perspective, but given Henan Lantian GasLtd's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

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

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Fortunately for readers, Henan Lantian GasLtd's earnings per share have been growing at 10% a year for the past five years. Earnings are growing pretty quickly, which is great, but it's uncomfortably to see the company paying out 148% of earnings. Unless there are extenuating circumstances, we feel this is a clear concern around the sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Henan Lantian GasLtd has delivered 36% dividend growth per year on average over the past three years. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

The Bottom Line

Should investors buy Henan Lantian GasLtd for the upcoming dividend? While it's nice to see earnings per share growing, we're curious about how Henan Lantian GasLtd intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Although, if you're still interested in Henan Lantian GasLtd and want to know more, you'll find it very useful to know what risks this stock faces. Case in point: We've spotted 1 warning sign for Henan Lantian GasLtd you should be aware of.

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.