Don't Buy EITA Resources Berhad (KLSE:EITA) For Its Next Dividend Without Doing These Checks
Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see EITA Resources Berhad (KLSE:EITA) is about to trade ex-dividend in the next 3 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the 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. This means that investors who purchase EITA Resources Berhad's shares on or after the 15th of June will not receive the dividend, which will be paid on the 7th of July.
The company's next dividend payment will be RM0.01 per share, and in the last 12 months, the company paid a total of RM0.025 per share. Calculating the last year's worth of payments shows that EITA Resources Berhad has a trailing yield of 3.7% on the current share price of MYR0.675. 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.
Check out our latest analysis for EITA Resources Berhad
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. EITA Resources Berhad paid out more than half (60%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether EITA Resources Berhad generated enough free cash flow to afford its dividend. EITA Resources Berhad paid out more free cash flow than it generated - 110%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
EITA Resources Berhad does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.
While EITA Resources Berhad's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to EITA Resources Berhad's ability to maintain its dividend.
Click here to see how much of its profit EITA Resources Berhad paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. EITA Resources Berhad's earnings per share have fallen at approximately 12% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, EITA Resources Berhad has increased its dividend at approximately 3.6% a year on average. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.
Final Takeaway
Should investors buy EITA Resources Berhad for the upcoming dividend? EITA Resources Berhad had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. Bottom line: EITA Resources Berhad has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
So if you're still interested in EITA Resources Berhad despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. We've identified 4 warning signs with EITA Resources Berhad (at least 1 which is potentially serious), 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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