We Wouldn't Be Too Quick To Buy Ajinomoto (Malaysia) Berhad (KLSE:AJI) Before It Goes Ex-Dividend

Readers hoping to buy Ajinomoto (Malaysia) Berhad (KLSE:AJI) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Thus, you can purchase Ajinomoto (Malaysia) Berhad's shares before the 28th of August in order to receive the dividend, which the company will pay on the 24th of September.

The company's next dividend payment will be RM00.4085 per share, and in the last 12 months, the company paid a total of RM0.41 per share. Calculating the last year's worth of payments shows that Ajinomoto (Malaysia) Berhad has a trailing yield of 3.1% on the current share price of RM013.08. 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 investigate whether Ajinomoto (Malaysia) Berhad can afford its dividend, and if the dividend could grow.

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Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Ajinomoto (Malaysia) Berhad paid out 50% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Ajinomoto (Malaysia) Berhad generated enough free cash flow to afford its dividend. It paid out an unsustainably high 312% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since Ajinomoto (Malaysia) Berhad is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

Ajinomoto (Malaysia) 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.

Ajinomoto (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 Ajinomoto (Malaysia) Berhad's ability to maintain its dividend.

See our latest analysis for Ajinomoto (Malaysia) Berhad

Click here to see how much of its profit Ajinomoto (Malaysia) 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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's not ideal to see Ajinomoto (Malaysia) Berhad's earnings per share have been shrinking at 3.7% a year over the previous five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Ajinomoto (Malaysia) Berhad has delivered 8.2% dividend growth per year on average over the past 10 years. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

To Sum It Up

Should investors buy Ajinomoto (Malaysia) Berhad for the upcoming dividend? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

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 Ajinomoto (Malaysia) Berhad. For example, we've found 2 warning signs for Ajinomoto (Malaysia) Berhad that we recommend you consider before investing in the business.

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.