Don't Buy PETRONAS Dagangan Berhad (KLSE:PETDAG) For Its Next Dividend Without Doing These Checks

Readers hoping to buy PETRONAS Dagangan Berhad (KLSE:PETDAG) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is usually set to be one business day 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Meaning, you will need to purchase PETRONAS Dagangan Berhad's shares before the 6th of June to receive the dividend, which will be paid on the 19th of June.

The company's next dividend payment will be RM00.18 per share. Last year, in total, the company distributed RM0.80 to shareholders. Based on the last year's worth of payments, PETRONAS Dagangan Berhad has a trailing yield of 4.0% on the current stock price of RM019.80. If you buy this business for its dividend, you should have an idea of whether PETRONAS Dagangan Berhad's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for PETRONAS Dagangan 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. Last year PETRONAS Dagangan Berhad paid out 95% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the past year it paid out 157% 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.

PETRONAS Dagangan 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.

Cash is slightly more important than profit from a dividend perspective, but given PETRONAS Dagangan Berhad's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

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

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That explains why we're not overly excited about PETRONAS Dagangan Berhad's flat earnings over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. Minimal earnings growth, combined with concerningly high payout ratios suggests that PETRONAS Dagangan Berhad is unlikely to grow the dividend much in future, and indeed the payment could be vulnerable to a cut.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. PETRONAS Dagangan Berhad's dividend payments per share have declined at 2.7% per year on average over the past 10 years, which is uninspiring.

The Bottom Line

Has PETRONAS Dagangan Berhad got what it takes to maintain its dividend payments? Earnings per share are effectively flat, plus PETRONAS Dagangan Berhad's dividend is not well covered by either earnings or cash flow, which is not great. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that in mind though, if the poor dividend characteristics of PETRONAS Dagangan Berhad don't faze you, it's worth being mindful of the risks involved with this business. Case in point: We've spotted 1 warning sign for PETRONAS Dagangan Berhad you should be aware of.

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.