Do These 3 Checks Before Buying Scicom (MSC) Berhad (KLSE:SCICOM) For Its Upcoming 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 Scicom (MSC) Berhad (KLSE:SCICOM) is about to go ex-dividend in just three days. If you purchase the stock on or after the 12th of March, you won't be eligible to receive this dividend, when it is paid on the 29th of March.

Scicom (MSC) Berhad's upcoming dividend is RM0.015 a share, following on from the last 12 months, when the company distributed a total of RM0.05 per share to shareholders. Calculating the last year's worth of payments shows that Scicom (MSC) Berhad has a trailing yield of 4.5% on the current share price of MYR1.12. 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! We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Scicom (MSC) 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. It paid out 77% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be worried about the risk of a drop in earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Scicom (MSC) Berhad paid out more free cash flow than it generated - 132%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

While Scicom (MSC) Berhad's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Scicom (MSC) Berhad to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

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. With that in mind, we're discomforted by Scicom (MSC) Berhad's 7.8% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Scicom (MSC) 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. Scicom (MSC) Berhad is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

The Bottom Line

Should investors buy Scicom (MSC) Berhad for the upcoming dividend? Scicom (MSC) 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 Scicom (MSC) Berhad is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in Scicom (MSC) Berhad despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Our analysis shows 2 warning signs for Scicom (MSC) Berhad and you should be aware of these before buying any shares.

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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