Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Shenzhen SED Industry Co., Ltd. (SZSE:000032) is about to go ex-dividend in just three days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the 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. Thus, you can purchase Shenzhen SED Industry's shares before the 7th of June in order to receive the dividend, which the company will pay on the 7th of June.
The company's next dividend payment will be CN¥0.11 per share, and in the last 12 months, the company paid a total of CN¥0.11 per share. Based on the last year's worth of payments, Shenzhen SED Industry stock has a trailing yield of around 0.7% on the current share price of CN¥15.69. If you buy this business for its dividend, you should have an idea of whether Shenzhen SED Industry's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is 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. Shenzhen SED Industry paid out a comfortable 31% of its profit last year. A useful secondary check can be to evaluate whether Shenzhen SED Industry generated enough free cash flow to afford its dividend. Over the past year it paid out 142% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
Shenzhen SED Industry 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 Shenzhen SED Industry's ability to maintain its dividend.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
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. This is why it's a relief to see Shenzhen SED Industry earnings per share are up 5.6% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Shenzhen SED Industry has delivered an average of 4.9% per year annual increase in its dividend, based on the past two years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
Final Takeaway
Is Shenzhen SED Industry an attractive dividend stock, or better left on the shelf? Shenzhen SED Industry has seen its earnings per share grow steadily and paid out less than half its profit over the last year. Unfortunately, its dividend was not well covered by free 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 Shenzhen SED Industry's dividend merits.
So if you want to do more digging on Shenzhen SED Industry, you'll find it worthwhile knowing the risks that this stock faces. In terms of investment risks, we've identified 2 warning signs with Shenzhen SED Industry and understanding them should be part of your investment process.
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.