Juewei Food Co., Ltd. (SHSE:603517) is about to trade ex-dividend in the next 2 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. 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 Juewei Food's shares on or after the 16th of October will not receive the dividend, which will be paid on the 16th of October.

The company's next dividend payment will be CN¥0.30 per share, on the back of last year when the company paid a total of CN¥0.50 to shareholders. Calculating the last year's worth of payments shows that Juewei Food has a trailing yield of 3.8% on the current share price of CN¥15.75. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. 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. Juewei Food distributed an unsustainably high 126% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. Over the last year, it paid out more than three-quarters (81%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's good to see that while Juewei Food's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by Juewei Food's 10% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past seven years, Juewei Food has increased its dividend at approximately 14% 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. Juewei Food is already paying out 126% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

Should investors buy Juewei Food for the upcoming dividend? It's never fun to see a company's earnings per share in retreat. Worse, Juewei Food's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Juewei Food.

Although, if you're still interested in Juewei Food and want to know more, you'll find it very useful to know what risks this stock faces. Case in point: We've spotted 1 warning sign for Juewei Food you should be aware of.

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.