Don't Race Out To Buy Farglory Land Development Co., Ltd. (TWSE:5522) Just Because It's Going Ex-Dividend

Readers hoping to buy Farglory Land Development Co., Ltd. (TWSE:5522) 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. 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. Therefore, if you purchase Farglory Land Development's shares on or after the 18th of June, you won't be eligible to receive the dividend, when it is paid on the 12th of July.

The company's next dividend payment will be NT$2.50 per share, on the back of last year when the company paid a total of NT$4.50 to shareholders. Last year's total dividend payments show that Farglory Land Development has a trailing yield of 5.1% on the current share price of NT$88.30. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Farglory Land Development can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Farglory Land Development

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Farglory Land Development distributed an unsustainably high 115% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year, it paid out dividends equivalent to 315% 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 Farglory Land Development intends to continue funding this dividend, or if it could be forced to cut the payment.

Cash is slightly more important than profit from a dividend perspective, but given Farglory Land Development's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

Click here to see how much of its profit Farglory Land Development 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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Fortunately for readers, Farglory Land Development's earnings per share have been growing at 10% a year for the past five years. Earnings are growing pretty quickly, which is great, but it's uncomfortably to see the company paying out 115% of earnings. We're wary of fast-growing companies flaming out by over-committing themselves financially, and consider this a yellow flag.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Farglory Land Development has lifted its dividend by approximately 2.5% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Farglory Land Development is keeping back more of its profits to grow the business.

Final Takeaway

Should investors buy Farglory Land Development for the upcoming dividend? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Farglory Land Development.

With that in mind though, if the poor dividend characteristics of Farglory Land Development don't faze you, it's worth being mindful of the risks involved with this business. To that end, you should learn about the 3 warning signs we've spotted with Farglory Land Development (including 2 which shouldn't be ignored).

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.