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Don't Race Out To Buy Wharf Real Estate Investment Company Limited (HKG:1997) Just Because It's Going Ex-Dividend

Simply Wall St

Wharf Real Estate Investment Company Limited (HKG:1997) stock is about to trade ex-dividend in 3 days time. Ex-dividend means that investors that purchase the stock on or after the 3rd of April will not receive this dividend, which will be paid on the 23rd of April.

Wharf Real Estate Investment's upcoming dividend is HK$0.93 a share, following on from the last 12 months, when the company distributed a total of HK$2.03 per share to shareholders. Calculating the last year's worth of payments shows that Wharf Real Estate Investment has a trailing yield of 6.5% on the current share price of HK$31.25. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Wharf Real Estate Investment

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. Wharf Real Estate Investment paid out 157% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance.

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

SEHK:1997 Historical Dividend Yield March 30th 2020

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Wharf Real Estate Investment's earnings per share have fallen at approximately 27% a year over the previous three years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Wharf Real Estate Investment has delivered 46% dividend growth per year on average over the past two years. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Wharf Real Estate Investment is already paying out 157% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Is Wharf Real Estate Investment worth buying for its dividend? Earnings per share are in decline and Wharf Real Estate Investment is paying out what we feel is an uncomfortably high percentage of its profit as dividends. Generally we think dividend investors should avoid businesses in this situation, as high payout ratios and declining earnings can lead to the dividend being cut. Wharf Real Estate Investment doesn't appear to have a lot going for it, and we're not inclined to take a risk on owning it for the dividend.

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 Wharf Real Estate Investment. For example - Wharf Real Estate Investment has 4 warning signs we think you should be aware of.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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.

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. Thank you for reading.