Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Shanghai Aohua Photoelectricity Endoscope Co., Ltd. (SHSE:688212) is about to trade ex-dividend in the next four 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. This means that investors who purchase Shanghai Aohua Photoelectricity Endoscope's shares on or after the 17th of June will not receive the dividend, which will be paid on the 17th of June.
The company's upcoming dividend is CN¥0.30 a share, following on from the last 12 months, when the company distributed a total of CN¥0.30 per share to shareholders. Calculating the last year's worth of payments shows that Shanghai Aohua Photoelectricity Endoscope has a trailing yield of 0.6% on the current share price of CN¥52.24. 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. Shanghai Aohua Photoelectricity Endoscope paid out 92% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. A useful secondary check can be to evaluate whether Shanghai Aohua Photoelectricity Endoscope generated enough free cash flow to afford its dividend.
It's good to see that while Shanghai Aohua Photoelectricity Endoscope's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Shanghai Aohua Photoelectricity Endoscope's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 40% 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. In the last two years, Shanghai Aohua Photoelectricity Endoscope has lifted its dividend by approximately 26% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Shanghai Aohua Photoelectricity Endoscope is already paying out 92% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
To Sum It Up
Is Shanghai Aohua Photoelectricity Endoscope worth buying for its dividend? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (92%) and cash flow as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. It's not that we think Shanghai Aohua Photoelectricity Endoscope is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
So if you're still interested in Shanghai Aohua Photoelectricity Endoscope despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Case in point: We've spotted 1 warning sign for Shanghai Aohua Photoelectricity Endoscope 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.