Dividend Investors: Don't Be Too Quick To Buy SLP Resources Berhad (KLSE:SLP) For Its Upcoming Dividend

SLP Resources Berhad (KLSE:SLP) is about to trade ex-dividend in the next three days. Investors can purchase shares before the 12th of March in order to be eligible for this dividend, which will be paid on the 13th of April.

SLP Resources Berhad's next dividend payment will be RM0.015 per share. Last year, in total, the company distributed RM0.055 to shareholders. Based on the last year's worth of payments, SLP Resources Berhad stock has a trailing yield of around 6.4% on the current share price of MYR0.865. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether SLP Resources Berhad can afford its dividend, and if the dividend could grow.

See our latest analysis for SLP Resources 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. SLP Resources Berhad paid out 107% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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. The company paid out 106% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

SLP Resources 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.

Cash is slightly more important than profit from a dividend perspective, but given SLP Resources Berhad's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

Click here to see how much of its profit SLP Resources 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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by SLP Resources Berhad's 11% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, SLP Resources Berhad has lifted its dividend by approximately 13% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. SLP Resources Berhad is already paying out 107% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Is SLP Resources Berhad an attractive dividend stock, or better left on the shelf? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (107%) and cash flow as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. Bottom line: SLP Resources Berhad has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of SLP Resources Berhad don't faze you, it's worth being mindful of the risks involved with this business. For instance, we've identified 3 warning signs for SLP Resources Berhad (1 makes us a bit uncomfortable) 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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