Don't Buy Poh Huat Resources Holdings Berhad (KLSE:POHUAT) For Its Next Dividend Without Doing These Checks

Poh Huat Resources Holdings Berhad (KLSE:POHUAT) stock is about to trade ex-dividend in four days. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. In other words, investors can purchase Poh Huat Resources Holdings Berhad's shares before the 8th of April in order to be eligible for the dividend, which will be paid on the 25th of April.

The company's next dividend payment will be RM00.02 per share, on the back of last year when the company paid a total of RM0.08 to shareholders. Last year's total dividend payments show that Poh Huat Resources Holdings Berhad has a trailing yield of 6.7% on the current share price of RM01.19. If you buy this business for its dividend, you should have an idea of whether Poh Huat Resources Holdings Berhad's dividend is reliable and sustainable. So we need to investigate whether Poh Huat Resources Holdings Berhad can afford its dividend, and if the dividend could grow.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

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. Poh Huat Resources Holdings Berhad is paying out an acceptable 74% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Poh Huat Resources Holdings Berhad generated enough free cash flow to afford its dividend. It paid out 78% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's positive to see that Poh Huat Resources Holdings 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.

View our latest analysis for Poh Huat Resources Holdings Berhad

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. 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 Poh Huat Resources Holdings Berhad's 14% 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.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Poh Huat Resources Holdings Berhad has increased its dividend at approximately 10% a year on average. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

To Sum It Up

Should investors buy Poh Huat Resources Holdings Berhad for the upcoming dividend? It's never good to see earnings per share shrinking, but at least the dividend payout ratios appear reasonable. We're aware though that if earnings continue to decline, the dividend could be at risk. Bottom line: Poh Huat Resources Holdings Berhad has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of Poh Huat Resources Holdings Berhad don't faze you, it's worth being mindful of the risks involved with this business. Every company has risks, and we've spotted 2 warning signs for Poh Huat Resources Holdings Berhad you should know about.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.