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Don't Buy China Railway Signal & Communication Corporation Limited (HKG:3969) For Its Next Dividend Without Doing These Checks

Simply Wall St ·  {{timeTz}}

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that China Railway Signal & Communication Corporation Limited (HKG:3969) is about to go ex-dividend in just two days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible 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. Thus, you can purchase China Railway Signal & Communication's shares before the 15th of June in order to receive the dividend, which the company will pay on the 15th of July.

The company's next dividend payment will be CN¥0.17 per share. Last year, in total, the company distributed CN¥0.17 to shareholders. Based on the last year's worth of payments, China Railway Signal & Communication stock has a trailing yield of around 7.1% on the current share price of HK$2.8. 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.

View our latest analysis for China Railway Signal & Communication

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. China Railway Signal & Communication paid out more than half (57%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether China Railway Signal & Communication generated enough free cash flow to afford its dividend. The company paid out 96% of its free cash flow over the last year, which we think is outside the ideal range 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 China Railway Signal & Communication'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. Were this to happen repeatedly, this would be a risk to China Railway Signal & Communication's ability to maintain its dividend.

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

SEHK:3969 Historic Dividend June 12th 2022

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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're not enthused to see that China Railway Signal & Communication's earnings per share have remained effectively flat 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.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past six years, China Railway Signal & Communication has increased its dividend at approximately 38% a year on average.

To Sum It Up

Is China Railway Signal & Communication worth buying for its dividend? It's not great to see earnings per share have been flat and that the company paid out an uncomfortably high percentage of its cash flow over the past year. Cash flows are typically more volatile than earnings, but this is still not what we like to see. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of China Railway Signal & Communication.

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 China Railway Signal & Communication. For example, we've found 1 warning sign for China Railway Signal & Communication that we recommend you consider before investing in the business.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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.

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