It Might Not Be A Great Idea To Buy Bermaz Auto Berhad (KLSE:BAUTO) For Its Next Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Bermaz Auto Berhad (KLSE:BAUTO) is about to go ex-dividend in just 3 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. This means that investors who purchase Bermaz Auto Berhad's shares on or after the 18th of July will not receive the dividend, which will be paid on the 2nd of August.

The company's next dividend payment will be RM00.1175 per share, and in the last 12 months, the company paid a total of RM0.26 per share. Last year's total dividend payments show that Bermaz Auto Berhad has a trailing yield of 9.9% on the current share price of RM02.62. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Bermaz Auto 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. Bermaz Auto Berhad is paying out an acceptable 63% of its profit, a common payout level among most companies. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Bermaz Auto Berhad paid out more free cash flow than it generated - 112%, 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.

Bermaz Auto 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 Bermaz Auto Berhad's ability to maintain its dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Bermaz Auto Berhad, with earnings per share up 5.7% on average over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Bermaz Auto Berhad has increased its dividend at approximately 26% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

The Bottom Line

From a dividend perspective, should investors buy or avoid Bermaz Auto Berhad? Earnings per share have grown somewhat, although Bermaz Auto Berhad paid out over half its profits and the dividend was not well covered by free cash flow. Bottom line: Bermaz Auto Berhad has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

So if you're still interested in Bermaz Auto Berhad despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example, Bermaz Auto Berhad has 3 warning signs (and 2 which are a bit unpleasant) we think you should know about.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.

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