Do These 3 Checks Before Buying SKP Resources Bhd (KLSE:SKPRES) For Its Upcoming Dividend

Readers hoping to buy SKP Resources Bhd (KLSE:SKPRES) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Meaning, you will need to purchase SKP Resources Bhd's shares before the 29th of September to receive the dividend, which will be paid on the 26th of October.

The company's next dividend payment will be RM0.045 per share. Last year, in total, the company distributed RM0.045 to shareholders. Calculating the last year's worth of payments shows that SKP Resources Bhd has a trailing yield of 4.5% on the current share price of MYR1.01. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for SKP Resources Bhd

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. SKP Resources Bhd is paying out an acceptable 56% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether SKP Resources Bhd generated enough free cash flow to afford its dividend. The company paid out 94% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

SKP Resources Bhd 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 SKP Resources Bhd 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?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're not enthused to see that SKP Resources Bhd's earnings per share have remained effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. SKP Resources Bhd has delivered an average of 9.8% per year annual increase in its dividend, based on the past 10 years of dividend payments.

To Sum It Up

Has SKP Resources Bhd got what it takes to maintain its dividend payments? Earnings per share have not grown and SKP Resources Bhd's profit payout ratio looks reasonable. However, it paid out a disconcertingly high percentage of its cashflow, which is a worry. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that being said, if you're still considering SKP Resources Bhd as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 2 warning signs for SKP Resources Bhd and you should be aware of these before buying any shares.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.