Dividend Investors: Don't Be Too Quick To Buy Amway (Malaysia) Holdings Berhad (KLSE:AMWAY) 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 Amway (Malaysia) Holdings Berhad (KLSE:AMWAY) is about to trade ex-dividend in the next 3 days. You can purchase shares before the 11th of March in order to receive the dividend, which the company will pay on the 26th of March.

Amway (Malaysia) Holdings Berhad's next dividend payment will be RM0.13 per share. Last year, in total, the company distributed RM0.28 to shareholders. Looking at the last 12 months of distributions, Amway (Malaysia) Holdings Berhad has a trailing yield of approximately 4.7% on its current stock price of MYR5.79. If you buy this business for its dividend, you should have an idea of whether Amway (Malaysia) Holdings Berhad's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Amway (Malaysia) Holdings Berhad

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. Amway (Malaysia) Holdings Berhad is paying out an acceptable 70% of its profit, a common payout level among most companies. 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. Amway (Malaysia) Holdings Berhad paid out more free cash flow than it generated - 126%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Amway (Malaysia) Holdings 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.

Amway (Malaysia) Holdings 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 Amway (Malaysia) Holdings Berhad to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit Amway (Malaysia) Holdings Berhad paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Amway (Malaysia) Holdings Berhad's earnings per share have fallen at approximately 6.0% a year over the previous 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. Amway (Malaysia) Holdings Berhad's dividend payments per share have declined at 6.9% 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.

To Sum It Up

Is Amway (Malaysia) Holdings Berhad worth buying for its dividend? Amway (Malaysia) Holdings Berhad had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not that we think Amway (Malaysia) Holdings Berhad is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in Amway (Malaysia) Holdings Berhad despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example, Amway (Malaysia) Holdings Berhad has 2 warning signs (and 1 which is significant) we think you should know about.

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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