Be Sure To Check Out Essex Bio-Technology Limited (HKG:1061) Before It Goes Ex-Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Essex Bio-Technology Limited (HKG:1061) is about to trade ex-dividend in the next couple of days. The ex-dividend date is commonly two business days before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. This means that investors who purchase Essex Bio-Technology's shares on or after the 23rd of May will not receive the dividend, which will be paid on the 9th of June.

The company's upcoming dividend is HK$0.06 a share, following on from the last 12 months, when the company distributed a total of HK$0.12 per share to shareholders. Last year's total dividend payments show that Essex Bio-Technology has a trailing yield of 2.6% on the current share price of HK$4.65. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Essex Bio-Technology can afford its dividend, and if the dividend could grow.

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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. Essex Bio-Technology is paying out just 22% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. 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. The good news is it paid out just 24% of its free cash flow in the last year.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

View our latest analysis for Essex Bio-Technology

Click here to see how much of its profit Essex Bio-Technology paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's not encouraging to see that Essex Bio-Technology's earnings are effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. Essex Bio-Technology is retaining more than three-quarters of its earnings and has a history of generating some growth in earnings. We think this is a reasonable combination.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Essex Bio-Technology has delivered 18% dividend growth per year on average over the past 10 years.

To Sum It Up

From a dividend perspective, should investors buy or avoid Essex Bio-Technology? Earnings per share have been flat over this time, but we're intrigued to see that Essex Bio-Technology is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine strong earnings per share growth with a low payout ratio, and Essex Bio-Technology is halfway there. Overall we think this is an attractive combination and worthy of further research.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. Every company has risks, and we've spotted 1 warning sign for Essex Bio-Technology you should know about.

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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.