Dividend Investors: Don't Be Too Quick To Buy Favelle Favco Berhad (KLSE:FAVCO) For Its Upcoming Dividend

By
Simply Wall St
Published
August 11, 2021
KLSE:FAVCO
Source: Shutterstock

It looks like Favelle Favco Berhad (KLSE:FAVCO) is about to go ex-dividend in the next four 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Accordingly, Favelle Favco Berhad investors that purchase the stock on or after the 16th of August will not receive the dividend, which will be paid on the 2nd of September.

The company's upcoming dividend is RM0.08 a share, following on from the last 12 months, when the company distributed a total of RM0.08 per share to shareholders. Last year's total dividend payments show that Favelle Favco Berhad has a trailing yield of 3.5% on the current share price of MYR2.26. If you buy this business for its dividend, you should have an idea of whether Favelle Favco Berhad's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Favelle Favco Berhad

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately Favelle Favco Berhad's payout ratio is modest, at just 40% of profit. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Favelle Favco Berhad paid out more free cash flow than it generated - 127%, to be precise - last year, which we think is concerningly 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.

Favelle Favco 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.

Favelle Favco 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 Favelle Favco Berhad's ability to maintain its dividend.

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

historic-dividend
KLSE:FAVCO Historic Dividend August 11th 2021

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by Favelle Favco Berhad's 14% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

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, Favelle Favco Berhad has lifted its dividend by approximately 4.8% a year on average.

Final Takeaway

Has Favelle Favco Berhad got what it takes to maintain its dividend payments? It's disappointing to see earnings per share declining, and this would ordinarily be enough to discourage us from most dividend stocks, even though Favelle Favco Berhad is paying out less than half its income as dividends. However, it's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. 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 in mind though, if the poor dividend characteristics of Favelle Favco Berhad don't faze you, it's worth being mindful of the risks involved with this business. Our analysis shows 2 warning signs for Favelle Favco Berhad and you should be aware of them before buying any shares.

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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