Dividend Investors: Don't Be Too Quick To Buy Dutch Lady Milk Industries Berhad (KLSE:DLADY) For Its Upcoming Dividend

Dutch Lady Milk Industries Berhad (KLSE:DLADY) stock is about to trade ex-dividend in three days. If you purchase the stock on or after the 11th of December, you won't be eligible to receive this dividend, when it is paid on the 24th of December.

Dutch Lady Milk Industries Berhad's next dividend payment will be RM0.40 per share. Last year, in total, the company distributed RM0.80 to shareholders. Based on the last year's worth of payments, Dutch Lady Milk Industries Berhad stock has a trailing yield of around 2.2% on the current share price of MYR36.62. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Dutch Lady Milk Industries Berhad can afford its dividend, and if the dividend could grow.

View our latest analysis for Dutch Lady Milk Industries Berhad

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Dutch Lady Milk Industries Berhad paid out 64% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year, it paid out more than three-quarters (85%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's positive to see that Dutch Lady Milk Industries Berhad's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Dutch Lady Milk Industries Berhad's earnings per share have dropped 6.2% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Dutch Lady Milk Industries Berhad has delivered 17% 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.

The Bottom Line

Is Dutch Lady Milk Industries Berhad worth buying for its dividend? It's never good to see earnings per share shrinking, but at least the dividend payout ratios appear reasonable. We're aware though that if earnings continue to decline, the dividend could be at risk. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

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 Dutch Lady Milk Industries Berhad. Case in point: We've spotted 1 warning sign for Dutch Lady Milk Industries Berhad you should be aware of.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. 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.
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