Do These 3 Checks Before Buying UMS Holdings Berhad (KLSE:UMS) For Its Upcoming Dividend

UMS Holdings Berhad (KLSE:UMS) is about to trade ex-dividend in the next 3 days. If you purchase the stock on or after the 12th of March, you won't be eligible to receive this dividend, when it is paid on the 29th of March.

UMS Holdings Berhad's next dividend payment will be RM0.06 per share, and in the last 12 months, the company paid a total of RM0.06 per share. Last year's total dividend payments show that UMS Holdings Berhad has a trailing yield of 3.2% on the current share price of MYR1.9. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether UMS Holdings Berhad can afford its dividend, and if the dividend could grow.

See our latest analysis for UMS Holdings Berhad

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. UMS Holdings Berhad distributed an unsustainably high 171% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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. Dividends consumed 55% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and UMS Holdings Berhad fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit UMS Holdings Berhad paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. UMS Holdings Berhad's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 38% a year over the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. UMS 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.

Final Takeaway

Is UMS Holdings Berhad worth buying for its dividend? Earnings per share have been in decline, which is not encouraging. Additionally, UMS Holdings 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. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

So if you're still interested in UMS Holdings Berhad despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Our analysis shows 4 warning signs for UMS Holdings Berhad that we strongly recommend you have a look at before investing in the company.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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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