We Wouldn't Be Too Quick To Buy Melbourne Enterprises Limited (HKG:158) Before It Goes Ex-Dividend

Readers hoping to buy Melbourne Enterprises Limited (HKG:158) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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 Melbourne Enterprises' shares on or after the 22nd of January will not receive the dividend, which will be paid on the 6th of February.

The company's next dividend payment will be HK$1.80 per share. Last year, in total, the company distributed HK$3.60 to shareholders. Looking at the last 12 months of distributions, Melbourne Enterprises has a trailing yield of approximately 6.0% on its current stock price of HK$60.40. 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! So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Melbourne Enterprises

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. Melbourne Enterprises reported a loss last year, so it's not great to see that it has continued paying a dividend. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If Melbourne Enterprises 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. The company paid out 95% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

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

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Melbourne Enterprises reported a loss last year, but at least the general trend suggests its income has been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Melbourne Enterprises's dividend payments per share have declined at 2.4% per year on average over the past 10 years, which is uninspiring.

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

The Bottom Line

Has Melbourne Enterprises got what it takes to maintain its dividend payments? It's hard to get used to Melbourne Enterprises paying a dividend despite reporting a loss over the past year. Worse, the dividend was not well covered by cash flow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Melbourne Enterprises.

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 Melbourne Enterprises. For example, Melbourne Enterprises has 2 warning signs (and 1 which is concerning) we think you should know about.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.