Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see L&K Engineering (Suzhou) Co.,Ltd. (SHSE:603929) is about to trade ex-dividend in the next 2 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 L&K Engineering (Suzhou)Ltd's shares on or after the 15th of May, you won't be eligible to receive the dividend, when it is paid on the 15th of May.
The company's next dividend payment will be CN¥1.00 per share, on the back of last year when the company paid a total of CN¥1.00 to shareholders. Based on the last year's worth of payments, L&K Engineering (Suzhou)Ltd has a trailing yield of 3.8% on the current stock price of CN¥26.11. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.
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. L&K Engineering (Suzhou)Ltd paid out more than half (57%) of its earnings last year, which is a regular payout ratio for most companies. 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. It paid out 9.8% of its free cash flow as dividends last year, which is conservatively low.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Click here to see how much of its profit L&K Engineering (Suzhou)Ltd paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. 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, L&K Engineering (Suzhou)Ltd's earnings per share have been growing at 18% a year for the past five years. L&K Engineering (Suzhou)Ltd has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. This is a reasonable combination that could hint at some further dividend increases in the future.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, seven years ago, L&K Engineering (Suzhou)Ltd has lifted its dividend by approximately 30% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
To Sum It Up
Should investors buy L&K Engineering (Suzhou)Ltd for the upcoming dividend? L&K Engineering (Suzhou)Ltd's growing earnings per share and conservative payout ratios make for a decent combination. We also like that it paid out a lower percentage of its cash flow. L&K Engineering (Suzhou)Ltd looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
So while L&K Engineering (Suzhou)Ltd looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Every company has risks, and we've spotted 1 warning sign for L&K Engineering (Suzhou)Ltd you should know about.
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.