Should Income Investors Look At Deleum Berhad (KLSE:DELEUM) Before Its Ex-Dividend?

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Deleum Berhad (KLSE:DELEUM) is about to go ex-dividend in just three 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. Thus, you can purchase Deleum Berhad's shares before the 13th of March in order to receive the dividend, which the company will pay on the 28th of March.

The company's upcoming dividend is RM00.053 a share, following on from the last 12 months, when the company distributed a total of RM0.11 per share to shareholders. Calculating the last year's worth of payments shows that Deleum Berhad has a trailing yield of 7.4% on the current share price of RM01.44. If you buy this business for its dividend, you should have an idea of whether Deleum Berhad's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Deleum Berhad

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. Deleum Berhad is paying out an acceptable 50% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Deleum Berhad generated enough free cash flow to afford its dividend. Over the past year it paid out 190% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Deleum Berhad 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.

While Deleum Berhad's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Deleum Berhad's ability to maintain its dividend.

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. For this reason, we're glad to see Deleum Berhad's earnings per share have risen 17% per annum over the last five years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Deleum Berhad has seen its dividend decline 2.4% per annum on average over the past 10 years, which is not great to see. Deleum Berhad is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

Final Takeaway

From a dividend perspective, should investors buy or avoid Deleum Berhad? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note Deleum Berhad paid out a much higher percentage of its free cash flow, which makes us uncomfortable. In summary, it's hard to get excited about Deleum Berhad from a dividend perspective.

With that being said, if dividends aren't your biggest concern with Deleum Berhad, you should know about the other risks facing this business. Be aware that Deleum Berhad is showing 2 warning signs in our investment analysis, and 1 of those is potentially serious...

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.