Should Income Investors Look At Churchill China plc (LON:CHH) Before Its Ex-Dividend?

It looks like Churchill China plc (LON:CHH) is about to go ex-dividend in the next 3 days. The ex-dividend date is two business days before a company’s record date in most cases, which is the date on which the company determines which shareholders are entitled 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. In other words, investors can purchase Churchill China’s shares before the 30th of April in order to be eligible for the dividend, which will be paid on the 4th of June.

The company’s upcoming dividend is UK£0.14 a share, following on from the last 12 months, when the company distributed a total of UK£0.21 per share to shareholders. Calculating the last year’s worth of payments shows that Churchill China has a trailing yield of 6.0% on the current share price of UK£3.50. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! As a result, readers should always check whether Churchill China has been able to grow its dividends, or if the dividend might be cut.

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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. Churchill China is paying out an acceptable 53% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Churchill China generated enough free cash flow to afford its dividend. It paid out more than half (74%) of its free cash flow in the past year, which is within an average range for most companies.

It’s positive to see that Churchill China’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.

Check out our latest analysis for Churchill China

Click here to see how much of its profit Churchill China paid out over the last 12 months.

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. 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 Churchill China’s earnings have been skyrocketing, up 108% per annum for the past five years. The current payout ratio suggests a good balance between rewarding shareholders with dividends, and reinvesting in growth. Earnings per share have been growing quickly and in combination with some reinvestment and a middling payout ratio, the stock may have decent dividend prospects going forwards.

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, 10 years ago, Churchill China has lifted its dividend by approximately 1.4% a year on average. It’s good to see both earnings and the dividend have improved – although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.

Final Takeaway

Has Churchill China got what it takes to maintain its dividend payments? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. However, we’d also note that Churchill China is paying out more than half of its earnings and cash flow as profits, which could limit the dividend growth if earnings growth slows. Overall, it’s hard to get excited about Churchill China from a dividend perspective.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. Case in point: We’ve spotted 2 warning signs for Churchill China you should be aware of.

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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.