Here's Why We're Wary Of Buying Celcomdigi Berhad's (KLSE:CDB) For Its Upcoming Dividend

It looks like Celcomdigi Berhad (KLSE:CDB) is about to go ex-dividend in the next 3 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible 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. Accordingly, Celcomdigi Berhad investors that purchase the stock on or after the 13th of June will not receive the dividend, which will be paid on the 28th of June.

The company's upcoming dividend is RM00.035 a share, following on from the last 12 months, when the company distributed a total of RM0.13 per share to shareholders. Based on the last year's worth of payments, Celcomdigi Berhad has a trailing yield of 3.5% on the current stock price of RM03.81. If you buy this business for its dividend, you should have an idea of whether Celcomdigi Berhad's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Celcomdigi 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. Celcomdigi Berhad paid out 98% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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. It paid out more than half (55%) of its free cash flow in the past year, which is within an average range for most companies.

It's good to see that while Celcomdigi Berhad's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

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 earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Celcomdigi Berhad's earnings per share have dropped 7.1% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Celcomdigi Berhad's dividend payments per share have declined at 4.7% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

To Sum It Up

Is Celcomdigi Berhad worth buying for its dividend? Earnings per share have been shrinking in recent times. Worse, Celcomdigi Berhad's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that in mind though, if the poor dividend characteristics of Celcomdigi Berhad don't faze you, it's worth being mindful of the risks involved with this business. For example - Celcomdigi Berhad has 2 warning signs we think you should be aware of.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.