Here's Why We're Wary Of Buying Pokfulam Development's (HKG:225) For Its Upcoming Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Pokfulam Development Company Limited (HKG:225) is about to go ex-dividend in just three days. The ex-dividend date generally occurs two days before the record date, which is the day on which shareholders need to be on the company's books in order 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. Therefore, if you purchase Pokfulam Development's shares on or after the 6th of June, you won't be eligible to receive the dividend, when it is paid on the 26th of June.

The company's next dividend payment will be HK$0.04 per share, and in the last 12 months, the company paid a total of HK$0.36 per share. Based on the last year's worth of payments, Pokfulam Development has a trailing yield of 7.0% on the current stock price of HK$5.14. 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! We need to see whether the dividend is covered by earnings and if it's growing.

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If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Pokfulam Development paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Dividends consumed 54% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

See our latest analysis for Pokfulam Development

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Pokfulam Development 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. Since the start of our data, 10 years ago, Pokfulam Development has lifted its dividend by approximately 2.9% a year on average.

Get our latest analysis on Pokfulam Development's balance sheet health here.

To Sum It Up

From a dividend perspective, should investors buy or avoid Pokfulam Development? It's hard to get used to Pokfulam Development paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that in mind though, if the poor dividend characteristics of Pokfulam Development don't faze you, it's worth being mindful of the risks involved with this business. We've identified 3 warning signs with Pokfulam Development (at least 1 which doesn't sit too well with us), and understanding them should be part of your investment process.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.