Here's Why We're Wary Of Buying Palace Capital's (LON:PCA) For Its Upcoming Dividend

It looks like Palace Capital Plc (LON:PCA) is about to go ex-dividend in the next four 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. In other words, investors can purchase Palace Capital's shares before the 23rd of November in order to be eligible for the dividend, which will be paid on the 29th of December.

The company's next dividend payment will be UK£0.037 per share, and in the last 12 months, the company paid a total of UK£0.15 per share. Last year's total dividend payments show that Palace Capital has a trailing yield of 6.5% on the current share price of £2.3. 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! We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Palace Capital

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. Palace Capital paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If Palace Capital didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Fortunately, it paid out only 47% of its free cash flow in the past year.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Palace Capital reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Palace Capital has lifted its dividend by approximately 14% a year on average.

We update our analysis on Palace Capital every 24 hours, so you can always get the latest insights on its financial health, here.

To Sum It Up

Is Palace Capital an attractive dividend stock, or better left on the shelf? It's hard to get used to Palace Capital paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

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 Palace Capital. For instance, we've identified 2 warning signs for Palace Capital (1 is concerning) you should be aware of.

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.