Here's Why We're Wary Of Buying PNE Industries' (SGX:BDA) For Its Upcoming Dividend

It looks like PNE Industries Ltd (SGX:BDA) is about to go ex-dividend in the next 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled 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. In other words, investors can purchase PNE Industries' shares before the 25th of January in order to be eligible for the dividend, which will be paid on the 16th of February.

The company's upcoming dividend is S$0.02 a share, following on from the last 12 months, when the company distributed a total of S$0.03 per share to shareholders. Based on the last year's worth of payments, PNE Industries stock has a trailing yield of around 5.0% on the current share price of SGD0.605. 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! As a result, readers should always check whether PNE Industries has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for PNE Industries

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. PNE Industries paid out a disturbingly high 334% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the last year, it paid out dividends equivalent to 520% 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 PNE Industries intends to continue funding this dividend, or if it could be forced to cut the payment.

PNE Industries 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 PNE Industries's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. PNE Industries's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 32% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, PNE Industries has lifted its dividend by approximately 6.5% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. PNE Industries is already paying out 334% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

Is PNE Industries worth buying for its dividend? Not only are earnings per share declining, but PNE Industries is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of PNE Industries.

Although, if you're still interested in PNE Industries and want to know more, you'll find it very useful to know what risks this stock faces. Our analysis shows 6 warning signs for PNE Industries that we strongly recommend you have a look at before investing in the company.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.