Here's Why We're Wary Of Buying Muda Holdings Berhad's (KLSE:MUDA) For Its Upcoming Dividend

Muda Holdings Berhad (KLSE:MUDA) stock is about to trade ex-dividend in three days. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Thus, you can purchase Muda Holdings Berhad's shares before the 26th of June in order to receive the dividend, which the company will pay on the 23rd of July.

The company's upcoming dividend is RM00.02 a share, following on from the last 12 months, when the company distributed a total of RM0.02 per share to shareholders. Last year's total dividend payments show that Muda Holdings Berhad has a trailing yield of 2.1% on the current share price of RM00.955. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

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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. Muda Holdings Berhad paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Dividends consumed 67% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

View our latest analysis for Muda Holdings Berhad

Click here to see how much of its profit Muda Holdings 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. Muda Holdings Berhad reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Muda Holdings Berhad has seen its dividend decline 4.0% per annum on average over the past 10 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.

Remember, you can always get a snapshot of Muda Holdings Berhad's financial health, by checking our visualisation of its financial health, here.

To Sum It Up

Should investors buy Muda Holdings Berhad for the upcoming dividend? First, it's not great to see the company paying a dividend despite being loss-making over the last year. On the plus side, the dividend was covered by free cash flow." It's not that we think Muda Holdings Berhad is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering Muda Holdings Berhad as an investment, you'll find it beneficial to know what risks this stock is facing. To help with this, we've discovered 3 warning signs for Muda Holdings Berhad (2 don't sit too well with us!) that you ought to be aware of before buying the shares.

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.