Shenzhen Mindray Bio-Medical Electronics Co., Ltd. (SZSE:300760) 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 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 Shenzhen Mindray Bio-Medical Electronics' shares before the 7th of November in order to receive the dividend, which the company will pay on the 7th of November.

The company's upcoming dividend is CN¥1.65 a share, following on from the last 12 months, when the company distributed a total of CN¥5.56 per share to shareholders. Last year's total dividend payments show that Shenzhen Mindray Bio-Medical Electronics has a trailing yield of 2.1% on the current share price of CN¥266.25. If you buy this business for its dividend, you should have an idea of whether Shenzhen Mindray Bio-Medical Electronics'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 from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Shenzhen Mindray Bio-Medical Electronics paid out 71% of its earnings to investors last year, a normal payout level for most businesses. 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 98% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

While Shenzhen Mindray Bio-Medical Electronics'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 Shenzhen Mindray Bio-Medical Electronics to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. 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's why it's comforting to see Shenzhen Mindray Bio-Medical Electronics's earnings have been skyrocketing, up 25% per annum for the past five years. Earnings have been growing quickly, 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. Since the start of our data, six years ago, Shenzhen Mindray Bio-Medical Electronics has lifted its dividend by approximately 33% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

Final Takeaway

From a dividend perspective, should investors buy or avoid Shenzhen Mindray Bio-Medical Electronics? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note Shenzhen Mindray Bio-Medical Electronics paid out a much higher percentage of its free cash flow, which makes us uncomfortable. In summary, it's hard to get excited about Shenzhen Mindray Bio-Medical Electronics from a dividend perspective.

So if you want to do more digging on Shenzhen Mindray Bio-Medical Electronics, you'll find it worthwhile knowing the risks that this stock faces. Our analysis shows 1 warning sign for Shenzhen Mindray Bio-Medical Electronics and you should be aware of this before buying any shares.

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.