Do These 3 Checks Before Buying Melbourne Enterprises Limited (HKG:158) For Its Upcoming Dividend

Melbourne Enterprises Limited (HKG:158) is about to trade ex-dividend in the next 3 days. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. This means that investors who purchase Melbourne Enterprises' shares on or after the 25th of June will not receive the dividend, which will be paid on the 13th of July.

The company's next dividend payment will be HK$1.60 per share, and in the last 12 months, the company paid a total of HK$3.20 per share. Last year's total dividend payments show that Melbourne Enterprises has a trailing yield of 5.7% on the current share price of HK$56.20. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.

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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. Melbourne Enterprises's dividend is not well covered by earnings, as the company lost money last year. This is not a sustainable state of affairs, so it would be worth investigating if earnings are expected to recover. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Over the last year, it paid out more than three-quarters (85%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

Check out our latest analysis for Melbourne Enterprises

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Melbourne Enterprises reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Melbourne Enterprises has seen its dividend decline 3.8% per annum on average over the past 10 years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

Get our latest analysis on Melbourne Enterprises's balance sheet health here.

Final Takeaway

Should investors buy Melbourne Enterprises for the upcoming dividend? It's hard to get used to Melbourne Enterprises paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Melbourne Enterprises.

So if you're still interested in Melbourne Enterprises despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. We've identified 2 warning signs with Melbourne Enterprises (at least 1 which is a bit unpleasant), and understanding these should be part of your investment process.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.