Don't Race Out To Buy Genting Malaysia Berhad (KLSE:GENM) Just Because It's Going Ex-Dividend
It looks like Genting Malaysia Berhad (KLSE:GENM) is about to go ex-dividend in the next four days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. This means that investors who purchase Genting Malaysia Berhad's shares on or after the 20th of March will not receive the dividend, which will be paid on the 15th of April.
The company's next dividend payment will be RM00.09 per share. Last year, in total, the company distributed RM0.15 to shareholders. Calculating the last year's worth of payments shows that Genting Malaysia Berhad has a trailing yield of 5.2% on the current share price of RM02.90. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
View our latest analysis for Genting Malaysia 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. Genting Malaysia Berhad distributed an unsustainably high 195% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year it paid out 52% of its free cash flow as dividends, within the usual 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 Genting Malaysia Berhad fortunately did generate enough cash to fund its dividend. 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 the company's payout ratio, plus analyst estimates of its future dividends.
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. With that in mind, we're discomforted by Genting Malaysia Berhad's 12% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Genting Malaysia Berhad has increased its dividend at approximately 5.5% a year on average. 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. Genting Malaysia Berhad is already paying out 195% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
The Bottom Line
Is Genting Malaysia Berhad 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, Genting Malaysia Berhad 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. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
So if you're still interested in Genting Malaysia Berhad despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. To help with this, we've discovered 2 warning signs for Genting Malaysia Berhad (1 is significant!) that you ought to be aware of before buying the shares.
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.
