Should Cahya Mata Sarawak Berhad (KLSE:CMSB) Be Part Of Your Income Portfolio?

Today we'll take a closer look at Cahya Mata Sarawak Berhad (KLSE:CMSB) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

A slim 1.4% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Cahya Mata Sarawak Berhad could have potential. Remember though, due to the recent spike in its share price, Cahya Mata Sarawak Berhad's yield will look lower, even though the market may now be factoring in an improvement in its long-term prospects. There are a few simple ways to reduce the risks of buying Cahya Mata Sarawak Berhad for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Cahya Mata Sarawak Berhad!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Looking at the data, we can see that 38% of Cahya Mata Sarawak Berhad's profits were paid out as dividends in the last 12 months. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Last year, Cahya Mata Sarawak Berhad paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

Remember, you can always get a snapshot of Cahya Mata Sarawak Berhad's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Cahya Mata Sarawak Berhad has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was RM0.02 in 2010, compared to RM0.03 last year. This works out to be a compound annual growth rate (CAGR) of approximately 6.0% a year over that time. The dividends haven't grown at precisely 6.0% every year, but this is a useful way to average out the historical rate of growth.

A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Over the past five years, it looks as though Cahya Mata Sarawak Berhad's EPS have declined at around 17% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Cahya Mata Sarawak Berhad's earnings per share, which support the dividend, have been anything but stable.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. First, we like Cahya Mata Sarawak Berhad's low dividend payout ratio, although we're a bit concerned that it paid out a substantially higher percentage of its free cash flow. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. In summary, Cahya Mata Sarawak Berhad has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we've picked out 2 warning signs for Cahya Mata Sarawak Berhad that investors should take into consideration.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

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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.
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