Don't Buy United Malt Group Limited (ASX:UMG) For Its Next Dividend Without Doing These Checks

It looks like United Malt Group Limited (ASX:UMG) is about to go ex-dividend in the next 4 days. 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. 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. Thus, you can purchase United Malt Group's shares before the 1st of December in order to receive the dividend, which the company will pay on the 17th of December.

The company's next dividend payment will be AU$0.035 per share, and in the last 12 months, the company paid a total of AU$0.055 per share. Based on the last year's worth of payments, United Malt Group has a trailing yield of 1.3% on the current stock price of A$4.1. If you buy this business for its dividend, you should have an idea of whether United Malt Group's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for United Malt Group

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. United Malt Group distributed an unsustainably high 119% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Thankfully its dividend payments took up just 35% of the free cash flow it generated, which is a comfortable payout ratio.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and United Malt Group 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. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. From this perspective, we're disturbed to see earnings per share plunged 73% over the last 12 months, and we'd wonder if the company has had some kind of major event that has skewed the calculation.

Given that United Malt Group has only been paying a dividend for a year, there's not much of a past history to draw insight from.

Final Takeaway

Is United Malt Group an attractive dividend stock, or better left on the shelf? It's not a great combination to see a company with earnings in decline and paying out 119% of its profits, which could imply the dividend may be at risk of being cut in the future. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of United Malt Group.

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 United Malt Group. Case in point: We've spotted 2 warning signs for United Malt Group you should be aware of.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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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