Dividend Investors: Don't Be Too Quick To Buy Tenaga Nasional Berhad (KLSE:TENAGA) For Its Upcoming Dividend

Readers hoping to buy Tenaga Nasional Berhad (KLSE:TENAGA) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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 important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. This means that investors who purchase Tenaga Nasional Berhad's shares on or after the 27th of March will not receive the dividend, which will be paid on the 18th of April.

The company's next dividend payment will be RM00.28 per share, and in the last 12 months, the company paid a total of RM0.46 per share. Based on the last year's worth of payments, Tenaga Nasional Berhad has a trailing yield of 4.0% on the current stock price of RM011.54. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Tenaga Nasional Berhad can afford its dividend, and if the dividend could grow.

See our latest analysis for Tenaga Nasional Berhad

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year, Tenaga Nasional Berhad paid out 96% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. Luckily it paid out just 12% of its free cash flow last year.

It's good to see that while Tenaga Nasional 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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Tenaga Nasional Berhad's earnings per share have fallen at approximately 6.1% 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.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Tenaga Nasional Berhad has delivered an average of 6.3% per year annual increase in its dividend, based on the past 10 years of dividend payments. 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. Tenaga Nasional Berhad is already paying out 96% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

Should investors buy Tenaga Nasional Berhad for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 96% 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 Tenaga Nasional Berhad's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Bottom line: Tenaga Nasional Berhad has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Although, if you're still interested in Tenaga Nasional Berhad and want to know more, you'll find it very useful to know what risks this stock faces. Be aware that Tenaga Nasional Berhad is showing 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

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.