It Might Not Be A Great Idea To Buy OSK Holdings Berhad (KLSE:OSK) 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 OSK Holdings Berhad (KLSE:OSK) is about to trade ex-dividend in the next four days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Therefore, if you purchase OSK Holdings Berhad's shares on or after the 13th of September, you won't be eligible to receive the dividend, when it is paid on the 30th of September.

The company's next dividend payment will be RM0.01 per share, and in the last 12 months, the company paid a total of RM0.04 per share. Based on the last year's worth of payments, OSK Holdings Berhad has a trailing yield of 4.4% on the current stock price of MYR0.905. 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 OSK Holdings Berhad can afford its dividend, and if the dividend could grow.

View our latest analysis for OSK Holdings Berhad

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. OSK Holdings Berhad paid out just 20% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. A useful secondary check can be to evaluate whether OSK Holdings Berhad generated enough free cash flow to afford its dividend. It paid out an unsustainably high 446% of its free cash flow as dividends over the past 12 months, which is worrying. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.

OSK Holdings Berhad paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to OSK Holdings Berhad's ability to maintain its dividend.

Click here to see how much of its profit OSK Holdings Berhad paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. OSK Holdings Berhad's earnings per share have fallen at approximately 9.2% a year over the previous 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. OSK Holdings Berhad's dividend payments per share have declined at 2.2% per year on average over the past 10 years, which is uninspiring. 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.

The Bottom Line

Should investors buy OSK Holdings Berhad for the upcoming dividend? It's disappointing to see earnings per share declining, and this would ordinarily be enough to discourage us from most dividend stocks, even though OSK Holdings Berhad is paying out less than half its income as dividends. However, it's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

So if you're still interested in OSK Holdings Berhad despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. We've identified 2 warning signs with OSK Holdings Berhad (at least 1 which is a bit concerning), and understanding them should be part of your investment process.

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. 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.
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