Guiyang Xintian Pharmaceutical Co.,Ltd. (SZSE:002873) stock is about to trade ex-dividend in two days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Therefore, if you purchase Guiyang Xintian PharmaceuticalLtd's shares on or after the 25th of June, you won't be eligible to receive the dividend, when it is paid on the 25th of June.

The company's next dividend payment will be CN¥0.07 per share. Last year, in total, the company distributed CN¥0.07 to shareholders. Last year's total dividend payments show that Guiyang Xintian PharmaceuticalLtd has a trailing yield of 0.8% on the current share price of CN¥8.69. If you buy this business for its dividend, you should have an idea of whether Guiyang Xintian PharmaceuticalLtd's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are 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. Guiyang Xintian PharmaceuticalLtd has a low and conservative payout ratio of just 23% of its income after tax. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out an unsustainably high 244% of its free cash flow as dividends over the past 12 months, which is worrying. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.

While Guiyang Xintian PharmaceuticalLtd's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Guiyang Xintian PharmaceuticalLtd 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 Guiyang Xintian PharmaceuticalLtd paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's not encouraging to see that Guiyang Xintian PharmaceuticalLtd's earnings are effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. Earnings have been growing somewhat, 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. Guiyang Xintian PharmaceuticalLtd has delivered an average of 2.6% per year annual increase in its dividend, based on the past six years of dividend payments.

To Sum It Up

Has Guiyang Xintian PharmaceuticalLtd got what it takes to maintain its dividend payments? Earnings per share have barely grown in this time, and although Guiyang Xintian PharmaceuticalLtd is paying out a low percentage of its profit, its dividend was not well covered by free cash flow. It's not common to see a company paying out a limited amount of its profits yet a substantially higher percentage of its cash flow, so we'd flag this as a concern. Overall, it's hard to get excited about Guiyang Xintian PharmaceuticalLtd from a dividend perspective.

If you're not too concerned about Guiyang Xintian PharmaceuticalLtd's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. Our analysis shows 2 warning signs for Guiyang Xintian PharmaceuticalLtd that we strongly recommend you have a look at before investing in the company.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com