ChongQing Zhengchuan Pharmaceutical Packaging Co.,Ltd (SHSE:603976) is about to trade ex-dividend in the next two days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase ChongQing Zhengchuan Pharmaceutical PackagingLtd's shares before the 25th of September in order to receive the dividend, which the company will pay on the 25th of September.

The company's next dividend payment will be CN¥0.10 per share, and in the last 12 months, the company paid a total of CN¥0.20 per share. Calculating the last year's worth of payments shows that ChongQing Zhengchuan Pharmaceutical PackagingLtd has a trailing yield of 1.5% on the current share price of CN¥13.60. 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.

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. Its dividend payout ratio is 83% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be concerned if earnings began to decline. 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. It distributed 48% of its free cash flow as dividends, a comfortable payout level for most companies.

It's positive to see that ChongQing Zhengchuan Pharmaceutical PackagingLtd's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see how much of its profit ChongQing Zhengchuan Pharmaceutical PackagingLtd paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by ChongQing Zhengchuan Pharmaceutical PackagingLtd's 8.2% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. ChongQing Zhengchuan Pharmaceutical PackagingLtd's dividend payments per share have declined at 7.9% per year on average over the past six years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

The Bottom Line

Is ChongQing Zhengchuan Pharmaceutical PackagingLtd an attractive dividend stock, or better left on the shelf? We're not enthused by the declining earnings per share, although at least the company's payout ratio is within a reasonable range, meaning it may not be at imminent risk of a dividend cut. In summary, while it has some positive characteristics, we're not inclined to race out and buy ChongQing Zhengchuan Pharmaceutical PackagingLtd today.

However if you're still interested in ChongQing Zhengchuan Pharmaceutical PackagingLtd as a potential investment, you should definitely consider some of the risks involved with ChongQing Zhengchuan Pharmaceutical PackagingLtd. To that end, you should learn about the 2 warning signs we've spotted with ChongQing Zhengchuan Pharmaceutical PackagingLtd (including 1 which shouldn't be ignored).

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.