Here's Why We're Wary Of Buying Bermaz Auto Berhad's (KLSE:BAUTO) For Its Upcoming Dividend

Readers hoping to buy Bermaz Auto Berhad (KLSE:BAUTO) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is one business day 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. Therefore, if you purchase Bermaz Auto Berhad's shares on or after the 18th of July, you won't be eligible to receive the dividend, when it is paid on the 2nd of August.

The company's upcoming dividend is RM00.1175 a share, following on from the last 12 months, when the company distributed a total of RM0.26 per share to shareholders. Last year's total dividend payments show that Bermaz Auto Berhad has a trailing yield of 9.9% on the current share price of RM02.62. 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 check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Bermaz Auto Berhad

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. Bermaz Auto Berhad paid out 63% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Bermaz Auto Berhad generated enough free cash flow to afford its dividend. Over the past year it paid out 112% 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.

Bermaz Auto Berhad paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Bermaz Auto Berhad's ability to maintain its dividend.

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

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Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Bermaz Auto Berhad earnings per share are up 5.7% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

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, 10 years ago, Bermaz Auto Berhad has lifted its dividend by approximately 26% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Final Takeaway

Is Bermaz Auto Berhad an attractive dividend stock, or better left on the shelf? Bermaz Auto Berhad is paying out a reasonable percentage of its income and an uncomfortably high 112% of its cash flow as dividends. At least earnings per share have been growing steadily. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

So if you're still interested in Bermaz Auto Berhad despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. We've identified 3 warning signs with Bermaz Auto Berhad (at least 2 which make us uncomfortable), and understanding them should be part of your investment process.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com