Zhejiang Gongdong Medical Technology Co., Ltd. (SHSE:605369) stock is about to trade ex-dividend in 3 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 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. Therefore, if you purchase Zhejiang Gongdong Medical Technology's shares on or after the 9th of July, you won't be eligible to receive the dividend, when it is paid on the 9th of July.

The company's next dividend payment will be CN¥0.30 per share, and in the last 12 months, the company paid a total of CN¥0.80 per share. Looking at the last 12 months of distributions, Zhejiang Gongdong Medical Technology has a trailing yield of approximately 2.0% on its current stock price of CN¥39.60. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Zhejiang Gongdong Medical Technology is paying out an acceptable 72% of its profit, a common payout level among most companies. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out 102% 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.

Zhejiang Gongdong Medical Technology 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.

Zhejiang Gongdong Medical Technology 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 Zhejiang Gongdong Medical Technology'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?

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That explains why we're not overly excited about Zhejiang Gongdong Medical Technology's flat earnings 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.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Zhejiang Gongdong Medical Technology's dividend payments per share have declined at 15% per year on average over the past three years, which is uninspiring.

Final Takeaway

From a dividend perspective, should investors buy or avoid Zhejiang Gongdong Medical Technology? Zhejiang Gongdong Medical Technology is paying out a reasonable percentage of its income yet an uncomfortably high 102% of its cash flow as dividends. What's more, earnings have barely grown. It's not that we think Zhejiang Gongdong Medical Technology is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Zhejiang Gongdong Medical Technology. For example, we've found 2 warning signs for Zhejiang Gongdong Medical Technology that we recommend you consider before investing in the business.

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.

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