Three Things You Should Check Before Buying P.I.E. Industrial Berhad (KLSE:PIE) For Its Dividend

Could P.I.E. Industrial Berhad (KLSE:PIE) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

A 1.6% yield is nothing to get excited about, but investors probably think the long payment history suggests P.I.E. Industrial Berhad has some staying power. That said, the recent jump in the share price will make P.I.E. Industrial Berhad's dividend yield look smaller, even though the company prospects could be improving. Some simple analysis can reduce the risk of holding P.I.E. Industrial Berhad for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on P.I.E. Industrial Berhad!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. In the last year, P.I.E. Industrial Berhad paid out 42% of its profit as dividends. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. P.I.E. Industrial Berhad paid out 52% of its free cash flow last year, which is acceptable, but is starting to limit the amount of earnings that can be reinvested into the business. It's positive to see that P.I.E. Industrial Berhad's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

With a strong net cash balance, P.I.E. Industrial Berhad investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on P.I.E. Industrial Berhad's financial position here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. P.I.E. Industrial Berhad has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was RM0.06 in 2011, compared to RM0.05 last year. The dividend has shrunk at around 1.5% a year during that period. P.I.E. Industrial Berhad's dividend hasn't shrunk linearly at 1.5% per annum, but the CAGR is a useful estimate of the historical rate of change.

A shrinking dividend over a 10-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. P.I.E. Industrial Berhad's EPS have fallen by approximately 14% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and P.I.E. Industrial Berhad's earnings per share, which support the dividend, have been anything but stable.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Above all, we're glad to see that P.I.E. Industrial Berhad pays out a low fraction of its earnings and, while it paid a higher percentage of cashflow, this also was within a normal range. Earnings per share are down, and P.I.E. Industrial Berhad's dividend has been cut at least once in the past, which is disappointing. Ultimately, P.I.E. Industrial Berhad comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 3 warning signs for P.I.E. Industrial Berhad that you should be aware of before investing.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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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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