We Wouldn't Be Too Quick To Buy Lii Hen Industries Bhd (KLSE:LIIHEN) Before It Goes Ex-Dividend

It looks like Lii Hen Industries Bhd (KLSE:LIIHEN) is about to go ex-dividend in the next three days. Typically, the ex-dividend date is two business days 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 important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. In other words, investors can purchase Lii Hen Industries Bhd's shares before the 13th of March in order to be eligible for the dividend, which will be paid on the 28th of March.

The company's next dividend payment will be RM00.007 per share, and in the last 12 months, the company paid a total of RM0.027 per share. Based on the last year's worth of payments, Lii Hen Industries Bhd stock has a trailing yield of around 4.7% on the current share price of RM00.57. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Lii Hen Industries Bhd

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. Its dividend payout ratio is 82% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be worried about the risk of a drop in earnings. 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. Lii Hen Industries Bhd paid out more free cash flow than it generated - 130%, 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.

Lii Hen Industries Bhd 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.

Lii Hen Industries Bhd 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 Lii Hen Industries Bhd's ability to maintain its dividend.

Click here to see how much of its profit Lii Hen Industries Bhd paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by Lii Hen Industries Bhd's 26% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Lii Hen Industries Bhd has delivered an average of 7.3% per year annual increase in its dividend, based on the past 10 years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Lii Hen Industries Bhd is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

From a dividend perspective, should investors buy or avoid Lii Hen Industries Bhd? Lii Hen Industries Bhd had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not that we think Lii Hen Industries Bhd is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that in mind though, if the poor dividend characteristics of Lii Hen Industries Bhd don't faze you, it's worth being mindful of the risks involved with this business. Our analysis shows 4 warning signs for Lii Hen Industries Bhd that we strongly recommend you have a look at before investing in the company.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.