Why It Might Not Make Sense To Buy Beshom Holdings Berhad (KLSE:BESHOM) For Its Upcoming Dividend

Beshom Holdings Berhad (KLSE:BESHOM) stock is about to trade ex-dividend in four days. The ex-dividend date generally occurs two days before the record date, which is the day on which shareholders need to be on the company's books in order to receive a 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 Beshom Holdings Berhad's shares before the 19th of November in order to be eligible for the dividend, which will be paid on the 27th of November.

The company's upcoming dividend is RM00.025 a share, following on from the last 12 months, when the company distributed a total of RM0.03 per share to shareholders. Based on the last year's worth of payments, Beshom Holdings Berhad stock has a trailing yield of around 4.4% on the current share price of RM00.675. If you buy this business for its dividend, you should have an idea of whether Beshom Holdings Berhad's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

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If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Beshom Holdings Berhad distributed an unsustainably high 116% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether Beshom Holdings Berhad generated enough free cash flow to afford its dividend. It paid out 79% 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 disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Beshom 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.

See our latest analysis for Beshom Holdings Berhad

Click here to see how much of its profit Beshom 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. Beshom Holdings Berhad's earnings per share have fallen at approximately 25% a year over the previous 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. Beshom Holdings Berhad's dividend payments per share have declined at 11% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

Final Takeaway

Is Beshom Holdings Berhad worth buying for its dividend? Earnings per share have been shrinking in recent times. What's more, Beshom Holdings Berhad is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Beshom Holdings Berhad.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Beshom Holdings Berhad. For example - Beshom Holdings Berhad has 3 warning signs we think you should be aware of.

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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.