Don't Race Out To Buy Holy Stone Enterprise Co.,Ltd. (TWSE:3026) Just Because It's Going Ex-Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Holy Stone Enterprise Co.,Ltd. (TWSE:3026) is about to trade ex-dividend in the next 4 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. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. In other words, investors can purchase Holy Stone EnterpriseLtd's shares before the 24th of June in order to be eligible for the dividend, which will be paid on the 19th of July.

The company's next dividend payment will be NT$5.00 per share, on the back of last year when the company paid a total of NT$5.00 to shareholders. Based on the last year's worth of payments, Holy Stone EnterpriseLtd stock has a trailing yield of around 5.1% on the current share price of NT$98.80. 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 investigate whether Holy Stone EnterpriseLtd can afford its dividend, and if the dividend could grow.

See our latest analysis for Holy Stone EnterpriseLtd

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. Holy Stone EnterpriseLtd distributed an unsustainably high 119% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the last year, it paid out more than three-quarters (80%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's good to see that while Holy Stone EnterpriseLtd's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Holy Stone EnterpriseLtd paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by Holy Stone EnterpriseLtd's 24% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last nine years, Holy Stone EnterpriseLtd has lifted its dividend by approximately 1.2% a year on average.

To Sum It Up

Is Holy Stone EnterpriseLtd worth buying for its dividend? It's never fun to see a company's earnings per share in retreat. Additionally, Holy Stone EnterpriseLtd is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Holy Stone EnterpriseLtd.

With that being said, if you're still considering Holy Stone EnterpriseLtd as an investment, you'll find it beneficial to know what risks this stock is facing. For instance, we've identified 2 warning signs for Holy Stone EnterpriseLtd (1 is significant) 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.

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