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Don't Buy Yuexiu Real Estate Investment Trust (HKG:405) For Its Next Dividend Without Doing These Checks

Simply Wall St

Yuexiu Real Estate Investment Trust (HKG:405) stock is about to trade ex-dividend in 4 days time. This means that investors who purchase shares on or after the 11th of September will not receive the dividend, which will be paid on the 17th of October.

Yuexiu Real Estate Investment Trust's next dividend payment will be CN¥0.15 per share. Last year, in total, the company distributed CN¥0.28 to shareholders. Calculating the last year's worth of payments shows that Yuexiu Real Estate Investment Trust has a trailing yield of 5.7% on the current share price of HK$5.29. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Yuexiu Real Estate Investment Trust

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. Yuexiu Real Estate Investment Trust paid out 101% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. That said, REITs are often required by law to distribute all of their earnings, and it's not unusual to see a REIT with a payout ratio around 100%. We wouldn't read too much into this. 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. It paid out 101% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.

Cash is slightly more important than profit from a dividend perspective, but given Yuexiu Real Estate Investment Trust'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 the company's payout ratio, plus analyst estimates of its future dividends.

SEHK:405 Historical Dividend Yield, September 6th 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 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, Yuexiu Real Estate Investment Trust's earnings per share have been growing at 13% a year for the past five years. We're a bit put out by the fact that Yuexiu Real Estate Investment Trust paid out virtually all of its earnings and cashflow as dividends over the last year. Earnings are growing at a decent clip, so this payout ratio may prove sustainable, but it's not great to see.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Yuexiu Real Estate Investment Trust has delivered 2.5% dividend growth per year on average over the past 10 years. Earnings per share have been growing much quicker than dividends, potentially because Yuexiu Real Estate Investment Trust is keeping back more of its profits to grow the business.

Final Takeaway

Should investors buy Yuexiu Real Estate Investment Trust for the upcoming dividend? While it's nice to see earnings per share growing, we're curious about how Yuexiu Real Estate Investment Trust intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Yuexiu Real Estate Investment Trust.

Wondering what the future holds for Yuexiu Real Estate Investment Trust? See what the six 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.