Why It Might Not Make Sense To Buy Nestlé (Malaysia) Berhad (KLSE:NESTLE) For Its Upcoming Dividend

Nestlé (Malaysia) Berhad (KLSE:NESTLE) is about to trade 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. Thus, you can purchase Nestlé (Malaysia) Berhad's shares before the 17th of April in order to receive the dividend, which the company will pay on the 16th of May.

The company's next dividend payment will be RM01.28 per share, on the back of last year when the company paid a total of RM2.68 to shareholders. Calculating the last year's worth of payments shows that Nestlé (Malaysia) Berhad has a trailing yield of 2.2% on the current share price of RM0122.90. If you buy this business for its dividend, you should have an idea of whether Nestlé (Malaysia) Berhad's dividend is reliable and sustainable. So we need to investigate whether Nestlé (Malaysia) Berhad can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Nestlé (Malaysia) Berhad

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Nestlé (Malaysia) Berhad paid out 95% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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. Dividends consumed 67% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's good to see that while Nestlé (Malaysia) Berhad's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

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

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's not encouraging to see that Nestlé (Malaysia) Berhad's earnings are effectively flat 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.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Nestlé (Malaysia) Berhad has delivered 1.3% dividend growth per year on average over the past 10 years.

Final Takeaway

Should investors buy Nestlé (Malaysia) Berhad for the upcoming dividend? Earnings per share have barely moved in recent times, and the company is paying out an uncomfortably high percentage of its income. Fortunately its cash generation was somewhat stronger. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Although, if you're still interested in Nestlé (Malaysia) Berhad and want to know more, you'll find it very useful to know what risks this stock faces. Every company has risks, and we've spotted 2 warning signs for Nestlé (Malaysia) Berhad you should know about.

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.