It Might Not Be A Great Idea To Buy Lysaght Galvanized Steel Berhad (KLSE:LYSAGHT) For Its Next Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Lysaght Galvanized Steel Berhad (KLSE:LYSAGHT) is about to trade ex-dividend in the next 3 days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase Lysaght Galvanized Steel Berhad's shares before the 4th of September in order to receive the dividend, which the company will pay on the 29th of September.

The company's next dividend payment will be RM00.08 per share, on the back of last year when the company paid a total of RM0.15 to shareholders. Based on the last year's worth of payments, Lysaght Galvanized Steel Berhad stock has a trailing yield of around 6.0% on the current share price of RM02.51. If you buy this business for its dividend, you should have an idea of whether Lysaght Galvanized Steel Berhad's dividend is reliable and sustainable. So we need to investigate whether Lysaght Galvanized Steel Berhad can afford its dividend, and if the dividend could grow.

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Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Lysaght Galvanized Steel Berhad paid out 70% of its earnings to investors last year, a normal payout level for most businesses. 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. Over the last year, it paid out dividends equivalent to 245% of what it generated in free cash flow, a disturbingly high percentage. Our definition of free cash flow excludes cash generated from asset sales, so since Lysaght Galvanized Steel Berhad is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

Lysaght Galvanized Steel 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.

Lysaght Galvanized Steel 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 Lysaght Galvanized Steel Berhad to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

See our latest analysis for Lysaght Galvanized Steel Berhad

Click here to see how much of its profit Lysaght Galvanized Steel Berhad paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That explains why we're not overly excited about Lysaght Galvanized Steel Berhad's flat earnings over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Lysaght Galvanized Steel Berhad's dividend payments are effectively flat on where they were nine years ago.

To Sum It Up

Is Lysaght Galvanized Steel Berhad an attractive dividend stock, or better left on the shelf? Earnings per share have not grown and Lysaght Galvanized Steel Berhad's profit payout ratio looks reasonable. However, it paid out a disconcertingly high percentage of its cashflow, which is a worry. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that being said, if you're still considering Lysaght Galvanized Steel Berhad as an investment, you'll find it beneficial to know what risks this stock is facing. To help with this, we've discovered 2 warning signs for Lysaght Galvanized Steel Berhad that you should be aware of before investing in their shares.

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.