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Dividend Investors: Don't Be Too Quick To Buy Event Hospitality & Entertainment Limited (ASX:EVT) For Its Upcoming Dividend

Simply Wall St

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Event Hospitality & Entertainment Limited (ASX:EVT) is about to go ex-dividend in just 4 days. You will need to purchase shares before the 4th of September to receive the dividend, which will be paid on the 19th of September.

Event Hospitality & Entertainment's next dividend payment will be AU$0.31 per share. Last year, in total, the company distributed AU$0.52 to shareholders. Calculating the last year's worth of payments shows that Event Hospitality & Entertainment has a trailing yield of 4.0% on the current share price of A$12.87. If you buy this business for its dividend, you should have an idea of whether Event Hospitality & Entertainment's dividend is reliable and sustainable. As a result, readers should always check whether Event Hospitality & Entertainment has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Event Hospitality & Entertainment

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Its dividend payout ratio is 78% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth We'd be concerned if earnings began to decline. 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 past year it paid out 176% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

While Event Hospitality & Entertainment's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Event Hospitality & Entertainment to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

ASX:EVT Historical Dividend Yield, August 30th 2019

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Event Hospitality & Entertainment, with earnings per share up 6.0% on average over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, Event Hospitality & Entertainment has lifted its dividend by approximately 5.7% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Final Takeaway

Should investors buy Event Hospitality & Entertainment for the upcoming dividend? Event Hospitality & Entertainment is paying out a reasonable percentage of its income and an uncomfortably high 176% of its cash flow as dividends. At least earnings per share have been growing steadily. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Event Hospitality & Entertainment.

Wondering what the future holds for Event Hospitality & Entertainment? See what the five analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.