It Might Not Be A Great Idea To Buy Swire Pacific Limited (HKG:19) For Its Next Dividend

It looks like Swire Pacific Limited (HKG:19) is about to go ex-dividend in the next 4 days. Typically, the ex-dividend date is two business days 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. Meaning, you will need to purchase Swire Pacific's shares before the 10th of September to receive the dividend, which will be paid on the 10th of October.

The company's next dividend payment will be HK$1.30 per share, and in the last 12 months, the company paid a total of HK$3.35 per share. Based on the last year's worth of payments, Swire Pacific stock has a trailing yield of around 5.0% on the current share price of HK$67.40. If you buy this business for its dividend, you should have an idea of whether Swire Pacific's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

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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. An unusually high payout ratio of 384% of its profit suggests something is happening other than the usual distribution of profits to shareholders. A useful secondary check can be to evaluate whether Swire Pacific generated enough free cash flow to afford its dividend. Over the last year it paid out 55% of its free cash flow as dividends, within the usual range for most companies.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Swire Pacific fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Check out our latest analysis for Swire Pacific

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Swire Pacific's earnings per share have plummeted approximately 31% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Swire Pacific has seen its dividend decline 1.5% per annum on average over the past 10 years, which is not great to see.

Final Takeaway

Is Swire Pacific worth buying for its dividend? It's never fun to see a company's earnings per share in retreat. Additionally, Swire Pacific is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. It's not that we think Swire Pacific is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in Swire Pacific despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Our analysis shows 3 warning signs for Swire Pacific and you should be aware of them before buying any shares.

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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.