Anhui Korrun Co., Ltd. (SZSE:300577) stock is about to trade ex-dividend in three days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Meaning, you will need to purchase Anhui Korrun's shares before the 5th of June to receive the dividend, which will be paid on the 5th of June.

The company's next dividend payment will be CN¥0.094 per share. Last year, in total, the company distributed CN¥0.094 to shareholders. Based on the last year's worth of payments, Anhui Korrun has a trailing yield of 0.4% on the current stock price of CN¥21.93. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Anhui Korrun can afford its dividend, and if the dividend could grow.

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Anhui Korrun paid out just 15% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. 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. The good news is it paid out just 25% of its free cash flow in the last year.

It's positive to see that Anhui Korrun's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. So we're not too excited that Anhui Korrun's earnings are down 4.5% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Anhui Korrun has seen its dividend decline 6.8% per annum on average over the past seven years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

The Bottom Line

Has Anhui Korrun got what it takes to maintain its dividend payments? Anhui Korrun has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Anhui Korrun's dividend merits.

While it's tempting to invest in Anhui Korrun for the dividends alone, you should always be mindful of the risks involved. In terms of investment risks, we've identified 1 warning sign with Anhui Korrun and understanding them should be part of your investment process.

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.