Why It Might Not Make Sense To Buy Blue Moon Group Holdings Limited (HKG:6993) For Its Upcoming Dividend

Blue Moon Group Holdings Limited (HKG:6993) stock is about to trade ex-dividend in 4 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. This means that investors who purchase Blue Moon Group Holdings' shares on or after the 20th of June will not receive the dividend, which will be paid on the 28th of July.

The company's next dividend payment will be HK$0.17 per share, on the back of last year when the company paid a total of HK$0.17 to shareholders. Calculating the last year's worth of payments shows that Blue Moon Group Holdings has a trailing yield of 3.8% on the current share price of HK$4.48. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Blue Moon Group Holdings has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Blue Moon Group Holdings

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Blue Moon Group Holdings distributed an unsustainably high 154% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether Blue Moon Group Holdings generated enough free cash flow to afford its dividend. Over the last year, it paid out dividends equivalent to 284% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how Blue Moon Group Holdings intends to continue funding this dividend, or if it could be forced to cut the payment.

Blue Moon Group Holdings 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.

Cash is slightly more important than profit from a dividend perspective, but given Blue Moon Group Holdings's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's encouraging to see Blue Moon Group Holdings has grown its earnings rapidly, up 43% a year for the past five years. Earnings per share have been growing rapidly, but the company is paying out a dividend that looks unsustainably high. Companies that pay out more than they earned while growing rapidly, can find themselves short of cash in a few years when growth slows.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Blue Moon Group Holdings has delivered 56% dividend growth per year on average over the past two years. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

The Bottom Line

Is Blue Moon Group Holdings worth buying for its dividend? While it's nice to see earnings per share growing, we're curious about how Blue Moon Group Holdings intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that in mind though, if the poor dividend characteristics of Blue Moon Group Holdings don't faze you, it's worth being mindful of the risks involved with this business. Every company has risks, and we've spotted 2 warning signs for Blue Moon Group Holdings (of which 1 shouldn't be ignored!) you should know about.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.