Guilin Sanjin Pharmaceutical Co., Ltd. (SZSE:002275) stock is about to trade ex-dividend in four 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. In other words, investors can purchase Guilin Sanjin Pharmaceutical's shares before the 29th of May in order to be eligible for the dividend, which will be paid on the 29th of May.

The company's next dividend payment will be CN¥0.30 per share. Last year, in total, the company distributed CN¥0.60 to shareholders. Based on the last year's worth of payments, Guilin Sanjin Pharmaceutical stock has a trailing yield of around 4.3% on the current share price of CN¥13.95. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Last year, Guilin Sanjin Pharmaceutical paid out 100% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. A useful secondary check can be to evaluate whether Guilin Sanjin Pharmaceutical generated enough free cash flow to afford its dividend. It paid out 92% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

As Guilin Sanjin Pharmaceutical's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

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 Guilin Sanjin Pharmaceutical's earnings are down 3.1% a year over the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Guilin Sanjin Pharmaceutical has delivered 0.9% dividend growth per year on average over the past 10 years.

Final Takeaway

Has Guilin Sanjin Pharmaceutical got what it takes to maintain its dividend payments? Not only are earnings per share declining, but Guilin Sanjin Pharmaceutical is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Although, if you're still interested in Guilin Sanjin Pharmaceutical and want to know more, you'll find it very useful to know what risks this stock faces. Case in point: We've spotted 1 warning sign for Guilin Sanjin Pharmaceutical you should be aware of.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.