Readers hoping to buy Shandong Longji Machinery Co.,Ltd (SZSE:002363) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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. 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. In other words, investors can purchase Shandong Longji MachineryLtd's shares before the 18th of October in order to be eligible for the dividend, which will be paid on the 18th of October.

The company's next dividend payment will be CN¥0.05 per share, on the back of last year when the company paid a total of CN¥0.08 to shareholders. Looking at the last 12 months of distributions, Shandong Longji MachineryLtd has a trailing yield of approximately 1.6% on its current stock price of CN¥6.35. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Shandong Longji MachineryLtd can afford its dividend, and if the dividend could grow.

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. Shandong Longji MachineryLtd distributed an unsustainably high 131% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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 16% of its free cash flow as dividends last year, which is conservatively low.

It's good to see that while Shandong Longji MachineryLtd'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 how much of its profit Shandong Longji MachineryLtd paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're discomforted by Shandong Longji MachineryLtd's 13% 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.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Shandong Longji MachineryLtd has lifted its dividend by approximately 7.2% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Shandong Longji MachineryLtd is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

Has Shandong Longji MachineryLtd got what it takes to maintain its dividend payments? It's never great to see earnings per share declining, especially when a company is paying out 131% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Shandong Longji MachineryLtd's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not that we think Shandong Longji MachineryLtd 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 Shandong Longji MachineryLtd. For instance, we've identified 2 warning signs for Shandong Longji MachineryLtd (1 is concerning) 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.