HKBN Ltd. (HKG:1310) is about to trade ex-dividend in the next four days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Thus, you can purchase HKBN's shares before the 11th of May in order to receive the dividend, which the company will pay on the 26th of May.

The company's next dividend payment will be HK$0.40 per share, and in the last 12 months, the company paid a total of HK$0.78 per share. Looking at the last 12 months of distributions, HKBN has a trailing yield of approximately 8.4% on its current stock price of HK$9.28. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether HKBN can afford its dividend, and if the dividend could grow.

View our latest analysis for HKBN

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year, HKBN paid out 220% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. A useful secondary check can be to evaluate whether HKBN generated enough free cash flow to afford its dividend. It paid out more than half (64%) of its free cash flow in the past year, which is within an average range for most companies.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and HKBN fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

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 fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see HKBN earnings per share are up 7.6% per annum over the last five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, six years ago, HKBN has lifted its dividend by approximately 25% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

From a dividend perspective, should investors buy or avoid HKBN? While earnings per share have been growing slowly, HKBN is paying out an uncomfortably high percentage of its earnings. However it did pay out a lower percentage of its cashflow. It's not that we think HKBN is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in HKBN and want to know more, you'll find it very useful to know what risks this stock faces. Every company has risks, and we've spotted 2 warning signs for HKBN you should know about.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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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.