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Dividend Investors: Don't Be Too Quick To Buy China Petroleum & Chemical Corporation (HKG:386) For Its Upcoming Dividend

Simply Wall St

China Petroleum & Chemical Corporation (HKG:386) stock is about to trade ex-dividend in 3 days time. Investors can purchase shares before the 6th of September in order to be eligible for this dividend, which will be paid on the 26th of September.

China Petroleum & Chemical's next dividend payment will be CN¥0.12 per share. Last year, in total, the company distributed CN¥0.42 to shareholders. Looking at the last 12 months of distributions, China Petroleum & Chemical has a trailing yield of approximately 9.9% on its current stock price of HK$4.65. 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! So we need to investigate whether China Petroleum & Chemical can afford its dividend, and if the dividend could grow.

View our latest analysis for China Petroleum & Chemical

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. It paid out 89% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be worried about the risk of a drop in 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 an unsustainably high 221% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how China Petroleum & Chemical intends to continue funding this dividend, or if it could be forced to the payment.

China Petroleum & Chemical paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were China Petroleum & Chemical 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.

SEHK:386 Historical Dividend Yield, September 2nd 2019

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. China Petroleum & Chemical's earnings per share have fallen at approximately 5.7% a year over the previous 5 years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. China Petroleum & Chemical has delivered 16% dividend growth per year on average over the past 10 years. 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. China Petroleum & Chemical 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

Is China Petroleum & Chemical worth buying for its dividend? China Petroleum & Chemical had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Wondering what the future holds for China Petroleum & Chemical? See what the 16 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.