Do These 3 Checks Before Buying Zhulian Corporation Berhad (KLSE:ZHULIAN) For Its Upcoming Dividend

Zhulian Corporation Berhad (KLSE:ZHULIAN) stock is about to trade ex-dividend in 4 days. You can purchase shares before the 16th of February in order to receive the dividend, which the company will pay on the 10th of March.

Zhulian Corporation Berhad's upcoming dividend is RM0.08 a share, following on from the last 12 months, when the company distributed a total of RM0.16 per share to shareholders. Looking at the last 12 months of distributions, Zhulian Corporation Berhad has a trailing yield of approximately 9.6% on its current stock price of MYR1.78. If you buy this business for its dividend, you should have an idea of whether Zhulian Corporation Berhad's dividend is reliable and sustainable. So we need to investigate whether Zhulian Corporation Berhad can afford its dividend, and if the dividend could grow.

View our latest analysis for Zhulian Corporation 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. Zhulian Corporation Berhad distributed an unsustainably high 118% 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. Over the last year, it paid out more than three-quarters (76%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's good to see that while Zhulian Corporation Berhad's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's not ideal to see Zhulian Corporation Berhad's earnings per share have been shrinking at 2.5% a year over the previous five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Zhulian Corporation Berhad has delivered an average of 6.6% 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. Zhulian Corporation Berhad is already paying out 118% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Is Zhulian Corporation Berhad an attractive dividend stock, or better left on the shelf? Earnings per share have been shrinking in recent times. Worse, Zhulian Corporation Berhad's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. Bottom line: Zhulian Corporation 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 Zhulian Corporation Berhad don't faze you, it's worth being mindful of the risks involved with this business. In terms of investment risks, we've identified 1 warning sign with Zhulian Corporation Berhad and understanding them should be part of your investment process.

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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