Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Anhui Xinhua Media Co., Ltd. (SHSE:601801) is about to go ex-dividend in just four days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a 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. In other words, investors can purchase Anhui Xinhua Media's shares before the 1st of July in order to be eligible for the dividend, which will be paid on the 1st of July.

The company's next dividend payment will be CN¥0.305 per share. Last year, in total, the company distributed CN¥0.30 to shareholders. Based on the last year's worth of payments, Anhui Xinhua Media stock has a trailing yield of around 4.4% on the current share price of CN¥6.95. 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 Anhui Xinhua Media can afford its dividend, and if the dividend could grow.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Anhui Xinhua Media paid out more than half (68%) of its earnings last year, which is a regular payout ratio for most companies. 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. It paid out an unsustainably high 281% of its free cash flow as dividends over the past 12 months, which is worrying. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.

Anhui Xinhua Media 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.

Anhui Xinhua Media paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Anhui Xinhua Media to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's not ideal to see Anhui Xinhua Media's earnings per share have been shrinking at 3.7% 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. In the past 10 years, Anhui Xinhua Media has increased its dividend at approximately 12% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.

The Bottom Line

Has Anhui Xinhua Media got what it takes to maintain its dividend payments? Anhui Xinhua Media had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Although, if you're still interested in Anhui Xinhua Media and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 2 warning signs for Anhui Xinhua Media (1 makes us a bit uncomfortable!) that deserve your attention before investing in the shares.

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.

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