Here's Why We're Wary Of Buying Palms Sports PJSC's (ADX:PALMS) For Its Upcoming Dividend

Palms Sports PJSC (ADX:PALMS) stock is about to trade ex-dividend in three 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 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 Palms Sports PJSC's shares before the 21st of February in order to be eligible for the dividend, which will be paid on the 12th of March.

The company's next dividend payment will be د.إ0.33333 per share. Last year, in total, the company distributed د.إ0.67 to shareholders. Looking at the last 12 months of distributions, Palms Sports PJSC has a trailing yield of approximately 7.9% on its current stock price of د.إ8.45. If you buy this business for its dividend, you should have an idea of whether Palms Sports PJSC's dividend is reliable and sustainable. As a result, readers should always check whether Palms Sports PJSC has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Palms Sports PJSC

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year, Palms Sports PJSC paid out 96% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the past year it paid out 129% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Palms Sports PJSC does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

As Palms Sports PJSC's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see how much of its profit Palms Sports PJSC paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by Palms Sports PJSC's 26% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Unfortunately Palms Sports PJSC has only been paying a dividend for a year or so, so there's not much of a history to draw insight from.

The Bottom Line

Has Palms Sports PJSC got what it takes to maintain its dividend payments? Not only are earnings per share declining, but Palms Sports PJSC is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. It's not that we think Palms Sports PJSC is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering Palms Sports PJSC as an investment, you'll find it beneficial to know what risks this stock is facing. Be aware that Palms Sports PJSC is showing 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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