Here's Why We're Wary Of Buying Mr D.I.Y. Group (M) Berhad's (KLSE:MRDIY) For Its Upcoming Dividend
Readers hoping to buy Mr D.I.Y. Group (M) Berhad (KLSE:MRDIY) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is two business days 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, Mr D.I.Y. Group (M) Berhad investors that purchase the stock on or after the 14th of October will not receive the dividend, which will be paid on the 30th of October.
The company's next dividend payment will be RM00.02 per share, on the back of last year when the company paid a total of RM0.08 to shareholders. Based on the last year's worth of payments, Mr D.I.Y. Group (M) Berhad stock has a trailing yield of around 6.4% on the current share price of RM01.25. 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 check whether the dividend payments are covered, and if earnings are growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Mr D.I.Y. Group (M) Berhad distributed an unsustainably high 121% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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. It paid out 89% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.
It's good to see that while Mr D.I.Y. Group (M) Berhad's dividends were not covered by profits, at least they are affordable from a cash perspective. 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.
Check out our latest analysis for Mr D.I.Y. Group (M) Berhad
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. With that in mind, we're discomforted by Mr D.I.Y. Group (M) Berhad's 13% per annum decline in earnings in the past 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. In the past six years, Mr D.I.Y. Group (M) Berhad has increased its dividend at approximately 27% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Mr D.I.Y. Group (M) 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.
Final Takeaway
Should investors buy Mr D.I.Y. Group (M) Berhad for the upcoming dividend? It's never fun to see a company's earnings per share in retreat. Additionally, Mr D.I.Y. Group (M) Berhad is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. Bottom line: Mr D.I.Y. Group (M) Berhad has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
With that in mind though, if the poor dividend characteristics of Mr D.I.Y. Group (M) Berhad don't faze you, it's worth being mindful of the risks involved with this business. For example - Mr D.I.Y. Group (M) Berhad has 1 warning sign 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.