Dividend Investors: Don't Be Too Quick To Buy New Hoong Fatt Holdings Berhad (KLSE:NHFATT) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see New Hoong Fatt Holdings Berhad (KLSE:NHFATT) is about to trade ex-dividend in the next 3 days. If you purchase the stock on or after the 30th of November, you won't be eligible to receive this dividend, when it is paid on the 31st of December.

New Hoong Fatt Holdings Berhad's next dividend payment will be RM0.03 per share. Last year, in total, the company distributed RM0.10 to shareholders. Last year's total dividend payments show that New Hoong Fatt Holdings Berhad has a trailing yield of 4.7% on the current share price of MYR2.12. 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! So we need to investigate whether New Hoong Fatt Holdings Berhad can afford its dividend, and if the dividend could grow.

Check out our latest analysis for New Hoong Fatt Holdings 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. Last year, New Hoong Fatt Holdings Berhad paid out 99% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. Fortunately, it paid out only 25% of its free cash flow in the past year.

It's good to see that while New Hoong Fatt Holdings Berhad's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

Click here to see how much of its profit New Hoong Fatt Holdings Berhad 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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see New Hoong Fatt Holdings Berhad's earnings per share have dropped 7.0% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. New Hoong Fatt Holdings Berhad's dividend payments are effectively flat on where they were 10 years ago. If a company's dividend stays flat while earnings are in decline, this is typically a sign that it is paying out a larger percentage of its earnings. This can become unsustainable if earnings fall far enough.

The Bottom Line

Is New Hoong Fatt Holdings Berhad worth buying for its dividend? It's never great to see earnings per share declining, especially when a company is paying out 99% of its profit as dividends, which we feel is uncomfortably high. 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. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that being said, if you're still considering New Hoong Fatt Holdings Berhad as an investment, you'll find it beneficial to know what risks this stock is facing. To that end, you should learn about the 4 warning signs we've spotted with New Hoong Fatt Holdings Berhad (including 1 which makes us a bit uncomfortable).

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. 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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