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We Wouldn't Be Too Quick To Buy Pacific Textiles Holdings Limited (HKG:1382) Before It Goes Ex-Dividend

Simply Wall St

Pacific Textiles Holdings Limited (HKG:1382) stock is about to trade ex-dividend in 4 days time. If you purchase the stock on or after the 13th of August, you won't be eligible to receive this dividend, when it is paid on the 29th of August.

Pacific Textiles Holdings's next dividend payment will be HK$0.25 per share. Last year, in total, the company distributed HK$0.57 to shareholders. Last year's total dividend payments show that Pacific Textiles Holdings has a trailing yield of 9.9% on the current share price of HK$5.76. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Pacific Textiles Holdings has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Pacific Textiles Holdings

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Pacific Textiles Holdings paid out 96% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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. It paid out 85% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's good to see that while Pacific Textiles Holdings's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

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

SEHK:1382 Historical Dividend Yield, August 8th 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Pacific Textiles Holdings's earnings per share have fallen at approximately 5.1% a year over the previous 5 years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Pacific Textiles Holdings has increased its dividend at approximately 25% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Pacific Textiles Holdings is already paying out 96% 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

From a dividend perspective, should investors buy or avoid Pacific Textiles Holdings? Earnings per share have been shrinking in recent times. What's more, Pacific Textiles Holdings is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Wondering what the future holds for Pacific Textiles Holdings? See what the seven 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.