Dividend Investors: Don't Be Too Quick To Buy X-Legend Entertainment Co., Ltd. (TWSE:4994) For Its Upcoming Dividend

It looks like X-Legend Entertainment Co., Ltd. (TWSE:4994) is about to go ex-dividend in the next 4 days. The ex-dividend date occurs one day 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 X-Legend Entertainment's shares on or after the 18th of June, you won't be eligible to receive the dividend, when it is paid on the 15th of July.

The company's next dividend payment will be NT$4.00 per share. Last year, in total, the company distributed NT$4.00 to shareholders. Last year's total dividend payments show that X-Legend Entertainment has a trailing yield of 3.1% on the current share price of NT$130.50. If you buy this business for its dividend, you should have an idea of whether X-Legend Entertainment's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for X-Legend Entertainment

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. X-Legend Entertainment paid out 107% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. A useful secondary check can be to evaluate whether X-Legend Entertainment generated enough free cash flow to afford its dividend. Luckily it paid out just 24% of its free cash flow last year.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and X-Legend Entertainment fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit X-Legend Entertainment paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see X-Legend Entertainment's earnings per share have dropped 17% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. X-Legend Entertainment has delivered an average of 14% per year annual increase in its dividend, based on the past 10 years of dividend payments. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. X-Legend Entertainment is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

Is X-Legend Entertainment an attractive dividend stock, or better left on the shelf? It's not a great combination to see a company with earnings in decline and paying out 107% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in X-Legend Entertainment's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

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 X-Legend Entertainment. For example - X-Legend Entertainment has 2 warning signs we think you should be aware of.

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.

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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.