Why It Might Not Make Sense To Buy Classic Scenic Berhad (KLSE:CSCENIC) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Classic Scenic Berhad (KLSE:CSCENIC) is about to trade ex-dividend in the next 3 days. You can purchase shares before the 11th of December in order to receive the dividend, which the company will pay on the 4th of January.

Classic Scenic Berhad's next dividend payment will be RM0.03 per share, on the back of last year when the company paid a total of RM0.05 to shareholders. Calculating the last year's worth of payments shows that Classic Scenic Berhad has a trailing yield of 5.3% on the current share price of MYR0.95. 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 Classic Scenic Berhad can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Classic Scenic Berhad

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Classic Scenic Berhad distributed an unsustainably high 144% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It distributed 31% of its free cash flow as dividends, a comfortable payout level for most companies.

It's good to see that while Classic Scenic Berhad's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Classic Scenic 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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Classic Scenic Berhad's earnings per share have dropped 16% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Classic Scenic Berhad's dividend payments per share have declined at 3.3% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

The Bottom Line

Is Classic Scenic Berhad worth buying for its dividend? It's never great to see earnings per share declining, especially when a company is paying out 144% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Classic Scenic Berhad's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that being said, if you're still considering Classic Scenic Berhad as an investment, you'll find it beneficial to know what risks this stock is facing. For instance, we've identified 4 warning signs for Classic Scenic Berhad (1 is concerning) you should be aware of.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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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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