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Should Income Investors Look At JNBY Design Limited (HKG:3306) Before Its Ex-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 JNBY Design Limited (HKG:3306) is about to go ex-dividend in just 4 days. You will need to purchase shares before the 22nd of October to receive the dividend, which will be paid on the 5th of November.

JNBY Design's next dividend payment will be HK$0.5 per share. Last year, in total, the company distributed HK$0.7 to shareholders. Calculating the last year's worth of payments shows that JNBY Design has a trailing yield of 6.7% on the current share price of HK$11.68. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for JNBY Design

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. JNBY Design paid out more than half (75%) of its earnings last year, which is a regular payout ratio for most companies. 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 171% 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.

JNBY Design 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.

JNBY Design paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were JNBY Design 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.

SEHK:3306 Historical Dividend Yield, October 17th 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, JNBY Design's earnings per share have been growing at 20% a year for the past five years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. JNBY Design has delivered 22% dividend growth per year on average over the past two years. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

The Bottom Line

From a dividend perspective, should investors buy or avoid JNBY Design? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note JNBY Design paid out a much higher percentage of its free cash flow, which makes us uncomfortable. To summarise, JNBY Design looks okay on this analysis, although it doesn't appear a stand-out opportunity.

Curious what other investors think of JNBY Design? See what analysts 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.