Chen Ke Ming Food Manufacturing Co., Ltd. (SZSE:002661) is about to trade ex-dividend in the next three days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Therefore, if you purchase Chen Ke Ming Food Manufacturing's shares on or after the 27th of September, you won't be eligible to receive the dividend, when it is paid on the 27th of September.

The company's next dividend payment will be CN¥0.20 per share. Last year, in total, the company distributed CN¥0.40 to shareholders. Last year's total dividend payments show that Chen Ke Ming Food Manufacturing has a trailing yield of 4.9% on the current share price of CN¥8.13. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

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. Last year, Chen Ke Ming Food Manufacturing paid out 253% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Dividends consumed 74% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Chen Ke Ming Food Manufacturing fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Chen Ke Ming Food Manufacturing paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Chen Ke Ming Food Manufacturing's earnings per share have plummeted approximately 33% 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. Chen Ke Ming Food Manufacturing has delivered 9.1% dividend growth per year on average over the past 10 years. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Chen Ke Ming Food Manufacturing is already paying out 253% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

From a dividend perspective, should investors buy or avoid Chen Ke Ming Food Manufacturing? Earnings per share have been shrinking in recent times. What's more, Chen Ke Ming Food Manufacturing is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. 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 Chen Ke Ming Food Manufacturing and want to know more, you'll find it very useful to know what risks this stock faces. To that end, you should learn about the 6 warning signs we've spotted with Chen Ke Ming Food Manufacturing (including 3 which don't sit too well with us).

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.