Don't Race Out To Buy UMS-Neiken Group Berhad (KLSE:UMSNGB) Just Because It's Going Ex-Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that UMS-Neiken Group Berhad (KLSE:UMSNGB) is about to go ex-dividend in just 4 days. If you purchase the stock on or after the 16th of March, you won't be eligible to receive this dividend, when it is paid on the 31st of March.

UMS-Neiken Group Berhad's next dividend payment will be RM0.03 per share, on the back of last year when the company paid a total of RM0.03 to shareholders. Based on the last year's worth of payments, UMS-Neiken Group Berhad stock has a trailing yield of around 3.1% on the current share price of MYR0.98. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for UMS-Neiken Group Berhad

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. UMS-Neiken Group Berhad paid out a comfortable 39% of its profit last year. 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. It paid out 92% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

While UMS-Neiken Group Berhad's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were UMS-Neiken Group Berhad to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit UMS-Neiken Group 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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by UMS-Neiken Group Berhad's 8.6% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. UMS-Neiken Group Berhad has delivered 11% dividend growth per year on average over the past 10 years.

Final Takeaway

Has UMS-Neiken Group Berhad got what it takes to maintain its dividend payments? UMS-Neiken Group Berhad's earnings per share have fallen noticeably and, although it paid out less than half its profit as dividends last year, it paid out a disconcertingly high percentage of its cashflow, which is not a great combination. Bottom line: UMS-Neiken Group Berhad has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

So if you're still interested in UMS-Neiken Group Berhad despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Every company has risks, and we've spotted 2 warning signs for UMS-Neiken Group Berhad (of which 1 is potentially serious!) you should know about.

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.

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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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