Why It Might Not Make Sense To Buy Power Root Berhad (KLSE:PWROOT) For Its Upcoming Dividend

It looks like Power Root Berhad (KLSE:PWROOT) is about to go ex-dividend in the next 3 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. In other words, investors can purchase Power Root Berhad's shares before the 13th of June in order to be eligible for the dividend, which will be paid on the 5th of July.

The company's next dividend payment will be RM00.013 per share. Last year, in total, the company distributed RM0.072 to shareholders. Calculating the last year's worth of payments shows that Power Root Berhad has a trailing yield of 3.3% on the current share price of RM01.72. 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 check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Power Root Berhad

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. Power Root Berhad paid out 73% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Power Root Berhad generated enough free cash flow to afford its dividend. Over the past year it paid out 151% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Power Root Berhad paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Power Root Berhad to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. 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 4.9% per annum over the last five years. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Power Root Berhad also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

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 1.6% per annum on average over the past 10 years, which is not great to see.

To Sum It Up

Is Power Root Berhad an attractive dividend stock, or better left on the shelf? Power Root Berhad is paying out a reasonable percentage of its income and an uncomfortably high 151% of its cash flow as dividends. At least earnings per share have been growing steadily. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Power Root Berhad.

With that being said, if you're still considering Power Root Berhad as an investment, you'll find it beneficial to know what risks this stock is facing. Every company has risks, and we've spotted 2 warning signs for Power Root 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.