Why It Might Not Make Sense To Buy Emperor Entertainment Hotel Limited (HKG:296) For Its Upcoming Dividend

Emperor Entertainment Hotel Limited (HKG:296) stock is about to trade ex-dividend in four days. If you purchase the stock on or after the 8th of December, you won't be eligible to receive this dividend, when it is paid on the 18th of December.

Emperor Entertainment Hotel's next dividend payment will be HK$0.015 per share, and in the last 12 months, the company paid a total of HK$0.06 per share. Looking at the last 12 months of distributions, Emperor Entertainment Hotel has a trailing yield of approximately 2.7% on its current stock price of HK$1.13. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Emperor Entertainment Hotel has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Emperor Entertainment Hotel

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Emperor Entertainment Hotel lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If Emperor Entertainment Hotel 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 44% of its free cash flow in the past year.

Click here to see how much of its profit Emperor Entertainment Hotel 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. Emperor Entertainment Hotel was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Emperor Entertainment Hotel's dividend payments per share have declined at 11% per year on average over the past 10 years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

Get our latest analysis on Emperor Entertainment Hotel's balance sheet health here.

The Bottom Line

From a dividend perspective, should investors buy or avoid Emperor Entertainment Hotel? We're a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. It's not that we think Emperor Entertainment Hotel is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

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 Emperor Entertainment Hotel. To help with this, we've discovered 2 warning signs for Emperor Entertainment Hotel (1 is potentially serious!) that you ought to be aware of before buying the shares.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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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. 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.
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