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

Padini Holdings Berhad (KLSE:PADINI) is about to trade ex-dividend in the next 2 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a 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 Padini Holdings Berhad's shares before the 14th of June in order to receive the dividend, which the company will pay on the 30th of June.

The company's next dividend payment will be RM0.025 per share, and in the last 12 months, the company paid a total of RM0.10 per share. Looking at the last 12 months of distributions, Padini Holdings Berhad has a trailing yield of approximately 3.4% on its current stock price of MYR2.93. If you buy this business for its dividend, you should have an idea of whether Padini Holdings Berhad's dividend is reliable and sustainable. As a result, readers should always check whether Padini Holdings Berhad has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Padini Holdings Berhad

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Padini Holdings Berhad distributed an unsustainably high 123% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Padini Holdings Berhad fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by Padini Holdings Berhad's 20% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Padini Holdings Berhad has delivered 13% dividend growth per year on average over the past 10 years. 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. Padini Holdings Berhad is already paying out 123% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Has Padini Holdings Berhad got what it takes to maintain its dividend payments? It's not a great combination to see a company with earnings in decline and paying out 123% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Padini Holdings Berhad's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Bottom line: Padini Holdings Berhad has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Padini Holdings Berhad. For example, we've found 2 warning signs for Padini Holdings Berhad that we recommend you consider before investing in the business.

If you're in the market for dividend stocks, we recommend checking our list of top 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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