Why It Might Not Make Sense To Buy Malayan Flour Mills Berhad (KLSE:MFLOUR) For Its Upcoming Dividend

It looks like Malayan Flour Mills Berhad (KLSE:MFLOUR) is about to go ex-dividend in the next 4 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Therefore, if you purchase Malayan Flour Mills Berhad's shares on or after the 17th of December, you won't be eligible to receive the dividend, when it is paid on the 30th of December.

The company's next dividend payment will be RM00.015 per share. Last year, in total, the company distributed RM0.03 to shareholders. Last year's total dividend payments show that Malayan Flour Mills Berhad has a trailing yield of 5.5% on the current share price of RM00.55. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Malayan Flour Mills Berhad has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Malayan Flour Mills Berhad

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Malayan Flour Mills Berhad distributed an unsustainably high 142% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. What's good is that dividends were well covered by free cash flow, with the company paying out 22% of its cash flow last year.

It's good to see that while Malayan Flour Mills Berhad's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

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. Readers will understand then, why we're concerned to see Malayan Flour Mills Berhad's earnings per share have dropped 9.2% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Malayan Flour Mills Berhad's dividend payments per share have declined at 13% per year on average over the past 10 years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

The Bottom Line

Should investors buy Malayan Flour Mills Berhad for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 142% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. Bottom line: Malayan Flour Mills Berhad has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of Malayan Flour Mills Berhad don't faze you, it's worth being mindful of the risks involved with this business. Every company has risks, and we've spotted 4 warning signs for Malayan Flour Mills Berhad you should know about.

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.