It looks like SF Oilless Bearing Group Co., Ltd. (SZSE:300817) is about to go ex-dividend in the next 3 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. Meaning, you will need to purchase SF Oilless Bearing Group's shares before the 6th of June to receive the dividend, which will be paid on the 6th of June.

The company's upcoming dividend is CN¥0.25 a share, following on from the last 12 months, when the company distributed a total of CN¥0.25 per share to shareholders. Calculating the last year's worth of payments shows that SF Oilless Bearing Group has a trailing yield of 2.0% on the current share price of CN¥12.22. If you buy this business for its dividend, you should have an idea of whether SF Oilless Bearing Group's dividend is reliable and sustainable. So we need to investigate whether SF Oilless Bearing 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. SF Oilless Bearing Group paid out more than half (74%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether SF Oilless Bearing Group generated enough free cash flow to afford its dividend. It paid out an unsustainably high 242% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since SF Oilless Bearing Group is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

SF Oilless Bearing Group paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to SF Oilless Bearing Group's ability to maintain its dividend.

Click here to see how much of its profit SF Oilless Bearing Group paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by SF Oilless Bearing Group's 7.9% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last four years, SF Oilless Bearing Group has lifted its dividend by approximately 20% 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

Should investors buy SF Oilless Bearing Group for the upcoming dividend? SF Oilless Bearing Group 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.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with SF Oilless Bearing Group. To help with this, we've discovered 2 warning signs for SF Oilless Bearing Group (1 shouldn't be ignored!) that you ought to be aware of before buying 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.