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Here's Why We're Wary Of Buying Pacific Online Limited's (HKG:543) For Its Upcoming Dividend

Simply Wall St

Readers hoping to buy Pacific Online Limited (HKG:543) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 21st of May to receive the dividend, which will be paid on the 8th of June.

Pacific Online's next dividend payment will be HK$0.11 per share, on the back of last year when the company paid a total of HK$0.11 to shareholders. Based on the last year's worth of payments, Pacific Online stock has a trailing yield of around 8.9% on the current share price of HK$1.33. 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 check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Pacific Online

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Its dividend payout ratio is 79% 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. A useful secondary check can be to evaluate whether Pacific Online generated enough free cash flow to afford its dividend. Over the past year it paid out 134% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Pacific Online does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

While Pacific Online'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. Were this to happen repeatedly, this would be a risk to Pacific Online's ability to maintain its dividend.

Click here to see how much of its profit Pacific Online paid out over the last 12 months.

SEHK:543 Historical Dividend Yield May 17th 2020

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see Pacific Online's earnings per share have dropped 7.4% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past ten years, Pacific Online has increased its dividend at approximately 2.0% a year on average.

The Bottom Line

Has Pacific Online got what it takes to maintain its dividend payments? Pacific Online had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not that we think Pacific Online is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that in mind though, if the poor dividend characteristics of Pacific Online don't faze you, it's worth being mindful of the risks involved with this business. Be aware that Pacific Online is showing 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

If you're in the market for dividend stocks, we recommend checking our list of top 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.