Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see PNE Industries Ltd (SGX:BDA) is about to trade ex-dividend in the next 4 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Accordingly, PNE Industries investors that purchase the stock on or after the 25th of May will not receive the dividend, which will be paid on the 16th of June.

The company's next dividend payment will be S$0.01 per share. Last year, in total, the company distributed S$0.05 to shareholders. Based on the last year's worth of payments, PNE Industries stock has a trailing yield of around 6.8% on the current share price of SGD0.735. If you buy this business for its dividend, you should have an idea of whether PNE Industries's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for PNE Industries

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. An unusually high payout ratio of 326% of its profit suggests something is happening other than the usual distribution of profits to shareholders. A useful secondary check can be to evaluate whether PNE Industries generated enough free cash flow to afford its dividend. Over the last year, it paid out more than three-quarters (83%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's good to see that while PNE Industries's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit PNE Industries 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 fall far enough, the company could be forced to cut its dividend. PNE Industries's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 34% a year over the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. PNE Industries has delivered an average of 12% per year annual increase in its dividend, based on the past 10 years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. PNE Industries is already paying out 326% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Is PNE Industries an attractive dividend stock, or better left on the shelf? It's never fun to see a company's earnings per share in retreat. Additionally, PNE Industries is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. Bottom line: PNE Industries has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with PNE Industries. Every company has risks, and we've spotted 5 warning signs for PNE Industries (of which 2 can't be ignored!) you should know about.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.