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 Shanxi Lanhua Sci-Tech Venture Co.,Ltd (SHSE:600123) is about to go ex-dividend in just 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Therefore, if you purchase Shanxi Lanhua Sci-Tech VentureLtd's shares on or after the 8th of February, you won't be eligible to receive the dividend, when it is paid on the 8th of February.
The company's upcoming dividend is CN¥0.75 a share, following on from the last 12 months, when the company distributed a total of CN¥0.77 per share to shareholders. Looking at the last 12 months of distributions, Shanxi Lanhua Sci-Tech VentureLtd has a trailing yield of approximately 6.9% on its current stock price of CN¥11.17. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is 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. That's why it's good to see Shanxi Lanhua Sci-Tech VentureLtd paying out a modest 44% of its earnings. 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 more than half (73%) of its free cash flow in the past year, which is within an average range for most companies.
It's positive to see that Shanxi Lanhua Sci-Tech VentureLtd'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 the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's comforting to see Shanxi Lanhua Sci-Tech VentureLtd's earnings have been skyrocketing, up 27% per annum for the past five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Shanxi Lanhua Sci-Tech VentureLtd has increased its dividend at approximately 5.2% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Shanxi Lanhua Sci-Tech VentureLtd is keeping back more of its profits to grow the business.
Final Takeaway
Has Shanxi Lanhua Sci-Tech VentureLtd got what it takes to maintain its dividend payments? From a dividend perspective, we're encouraged to see that earnings per share have been growing, the company is paying out less than half of its earnings, and a bit over half its free cash flow. Shanxi Lanhua Sci-Tech VentureLtd looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
So while Shanxi Lanhua Sci-Tech VentureLtd looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. For example, we've found 1 warning sign for Shanxi Lanhua Sci-Tech VentureLtd that we recommend you consider before investing in the business.
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.