It Might Not Be A Great Idea To Buy AEON Stores (Hong Kong) Co., Limited (HKG:984) For Its Next Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see AEON Stores (Hong Kong) Co., Limited (HKG:984) is about to trade ex-dividend in the next four 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. In other words, investors can purchase AEON Stores (Hong Kong)'s shares before the 1st of June in order to be eligible for the dividend, which will be paid on the 25th of June.

The company's next dividend payment will be HK$0.05 per share, on the back of last year when the company paid a total of HK$0.10 to shareholders. Based on the last year's worth of payments, AEON Stores (Hong Kong) stock has a trailing yield of around 5.2% on the current share price of HK$1.91. 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.

Check out our latest analysis for AEON Stores (Hong Kong)

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. AEON Stores (Hong Kong) 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. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. 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. It paid out 2.2% of its free cash flow as dividends last year, which is conservatively low.

Click here to see how much of its profit AEON Stores (Hong Kong) 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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. AEON Stores (Hong Kong) 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. AEON Stores (Hong Kong)'s dividend payments per share have declined at 14% 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.

We update our analysis on AEON Stores (Hong Kong) every 24 hours, so you can always get the latest insights on its financial health, here.

The Bottom Line

Has AEON Stores (Hong Kong) got what it takes to maintain its dividend payments? 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 an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

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 AEON Stores (Hong Kong). Our analysis shows 3 warning signs for AEON Stores (Hong Kong) that we strongly recommend you have a look at before investing in the company.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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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