Why It Might Not Make Sense To Buy Shangri-La Hotels (Malaysia) Berhad (KLSE:SHANG) For Its Upcoming Dividend

It looks like Shangri-La Hotels (Malaysia) Berhad (KLSE:SHANG) is about to go ex-dividend in the next 4 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 because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Accordingly, Shangri-La Hotels (Malaysia) Berhad investors that purchase the stock on or after the 14th of October will not receive the dividend, which will be paid on the 6th of November.

The company's next dividend payment will be RM00.03 per share, and in the last 12 months, the company paid a total of RM0.10 per share. Based on the last year's worth of payments, Shangri-La Hotels (Malaysia) Berhad stock has a trailing yield of around 5.9% on the current share price of RM01.69. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

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Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Shangri-La Hotels (Malaysia) Berhad paid out more than half (69%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether Shangri-La Hotels (Malaysia) Berhad generated enough free cash flow to afford its dividend. 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. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

Shangri-La Hotels (Malaysia) Berhad 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 Shangri-La Hotels (Malaysia) Berhad's ability to maintain its dividend.

See our latest analysis for Shangri-La Hotels (Malaysia) Berhad

Click here to see how much of its profit Shangri-La Hotels (Malaysia) Berhad paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. 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 Shangri-La Hotels (Malaysia) Berhad's 13% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Shangri-La Hotels (Malaysia) Berhad's dividend payments per share have declined at 1.8% per year on average over the past 10 years, which is uninspiring.

The Bottom Line

From a dividend perspective, should investors buy or avoid Shangri-La Hotels (Malaysia) Berhad? Shangri-La Hotels (Malaysia) Berhad 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 Shangri-La Hotels (Malaysia) Berhad is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering Shangri-La Hotels (Malaysia) Berhad as an investment, you'll find it beneficial to know what risks this stock is facing. Case in point: We've spotted 1 warning sign for Shangri-La Hotels (Malaysia) Berhad you should be aware of.

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

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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.