Dividend Investors: Don't Be Too Quick To Buy Maxis Berhad (KLSE:MAXIS) For Its Upcoming Dividend

Maxis Berhad (KLSE:MAXIS) stock is about to trade ex-dividend in three 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 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 Maxis Berhad's shares before the 22nd of November to receive the dividend, which will be paid on the 23rd of December.

The company's upcoming dividend is RM00.04 a share, following on from the last 12 months, when the company distributed a total of RM0.16 per share to shareholders. Based on the last year's worth of payments, Maxis Berhad stock has a trailing yield of around 4.7% on the current share price of RM03.44. If you buy this business for its dividend, you should have an idea of whether Maxis Berhad's dividend is reliable and sustainable. So we need to investigate whether Maxis Berhad can afford its dividend, and if the dividend could grow.

See our latest analysis for Maxis Berhad

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Maxis Berhad paid out 111% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. A useful secondary check can be to evaluate whether Maxis Berhad generated enough free cash flow to afford its dividend. It distributed 38% of its free cash flow as dividends, a comfortable payout level for most companies.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Maxis Berhad fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Maxis Berhad's earnings per share have fallen at approximately 8.7% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Maxis Berhad has seen its dividend decline 8.8% per annum on average over the past 10 years, which is not great to see. 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

Has Maxis Berhad got what it takes to maintain its dividend payments? It's never great to see earnings per share declining, especially when a company is paying out 111% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Maxis Berhad's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not that we think Maxis Berhad is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that in mind though, if the poor dividend characteristics of Maxis Berhad don't faze you, it's worth being mindful of the risks involved with this business. Every company has risks, and we've spotted 2 warning signs for Maxis Berhad 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.