Don't Buy Power Root Berhad (KLSE:PWROOT) For Its Next Dividend Without Doing These Checks

It looks like Power Root Berhad (KLSE:PWROOT) is about to go ex-dividend in the next 4 days. The ex-dividend date is usually set to be two business days 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 of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. This means that investors who purchase Power Root Berhad's shares on or after the 12th of March will not receive the dividend, which will be paid on the 3rd of April.

The company's upcoming dividend is RM00.02 a share, following on from the last 12 months, when the company distributed a total of RM0.048 per share to shareholders. Last year's total dividend payments show that Power Root Berhad has a trailing yield of 3.5% on the current share price of RM01.38. If you buy this business for its dividend, you should have an idea of whether Power Root Berhad's dividend is reliable and sustainable. As a result, readers should always check whether Power Root Berhad has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Power Root Berhad

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Its dividend payout ratio is 84% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. It could become a concern if earnings started to decline. 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 last year, it paid out more than three-quarters (88%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Power Root Berhad earnings per share are up 2.7% per annum over the last five years. A high payout ratio of 84% generally happens when a company can't find better uses for the cash. Combined with slim earnings growth in the past few years, Power Root Berhad could be signalling that its future growth prospects are thin.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Power Root Berhad has seen its dividend decline 5.4% per annum on average over the past 10 years, which is not great to see. It's unusual to see earnings per share increasing at the same time as dividends per share have been in decline. We'd hope it's because the company is reinvesting heavily in its business, but it could also suggest business is lumpy.

To Sum It Up

Is Power Root Berhad worth buying for its dividend? Earnings per share have been growing modestly and Power Root Berhad paid out a bit over half of its earnings and free cash flow last year. Overall, it's hard to get excited about Power Root Berhad from a dividend perspective.

With that being said, if dividends aren't your biggest concern with Power Root Berhad, you should know about the other risks facing this business. For example, we've found 2 warning signs for Power Root Berhad that we recommend you consider before investing in the business.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.