Dividend Investors: Don't Be Too Quick To Buy Nova Wellness Group Berhad (KLSE:NOVA) For Its Upcoming Dividend

Nova Wellness Group Berhad (KLSE:NOVA) is about to trade ex-dividend in the next three days. You will need to purchase shares before the 25th of February to receive the dividend, which will be paid on the 5th of March.

The upcoming dividend for Nova Wellness Group Berhad will put a total of RM0.018 per share in shareholders' pockets, up from last year's total dividends of RM0.015. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Nova Wellness Group Berhad can afford its dividend, and if the dividend could grow.

View our latest analysis for Nova Wellness Group 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. Nova Wellness Group Berhad paid out a comfortable 33% of its profit last year. A useful secondary check can be to evaluate whether Nova Wellness Group Berhad generated enough free cash flow to afford its dividend. Nova Wellness Group Berhad paid out more free cash flow than it generated - 129%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Nova Wellness Group Berhad does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

While Nova Wellness Group Berhad's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Nova Wellness Group Berhad's ability to maintain its dividend.

Click here to see how much of its profit Nova Wellness Group Berhad paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Nova Wellness Group Berhad's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 65% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Nova Wellness Group Berhad has seen its dividend decline 9.3% per annum on average over the past two years, which is not great to see. 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.

To Sum It Up

Is Nova Wellness Group Berhad an attractive dividend stock, or better left on the shelf? Nova Wellness Group Berhad's earnings per share have fallen noticeably and, although it paid out less than half its profit as dividends last year, it paid out a disconcertingly high percentage of its cashflow, which is not a great combination. It's not that we think Nova Wellness Group Berhad is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in Nova Wellness Group Berhad despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For instance, we've identified 3 warning signs for Nova Wellness Group Berhad (1 is potentially serious) you should be aware of.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

If you’re looking to trade Nova Wellness Group Berhad, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.