Shahe Industrial Co., Ltd. (SZSE:000014) stock is about to trade ex-dividend in three days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase Shahe Industrial's shares on or after the 6th of June will not receive the dividend, which will be paid on the 6th of June.
The company's upcoming dividend is CN¥0.216 a share, following on from the last 12 months, when the company distributed a total of CN¥0.22 per share to shareholders. Based on the last year's worth of payments, Shahe Industrial has a trailing yield of 2.1% on the current stock price of CN¥10.51. If you buy this business for its dividend, you should have an idea of whether Shahe Industrial's dividend is reliable and sustainable. 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. Shahe Industrial is paying out just 13% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. The company paid out 106% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.
Shahe Industrial 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.
Shahe Industrial 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 Shahe Industrial to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
Click here to see how much of its profit Shahe Industrial paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's comforting to see Shahe Industrial's earnings have been skyrocketing, up 23% per annum for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
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, Shahe Industrial has increased its dividend at approximately 26% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
The Bottom Line
Should investors buy Shahe Industrial for the upcoming dividend? We're glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it's not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Shahe Industrial's dividend merits.
In light of that, while Shahe Industrial has an appealing dividend, it's worth knowing the risks involved with this stock. Every company has risks, and we've spotted 2 warning signs for Shahe Industrial (of which 1 shouldn't be ignored!) 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.