Here's Why We're Wary Of Buying Luxchem Corporation Berhad's (KLSE:LUXCHEM) For Its Upcoming Dividend
It looks like Luxchem Corporation Berhad (KLSE:LUXCHEM) is about to go ex-dividend in the next 2 days. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. In other words, investors can purchase Luxchem Corporation Berhad's shares before the 6th of August in order to be eligible for the dividend, which will be paid on the 28th of August.
The company's next dividend payment will be RM00.01 per share, and in the last 12 months, the company paid a total of RM0.017 per share. Based on the last year's worth of payments, Luxchem Corporation Berhad has a trailing yield of 4.0% on the current stock price of RM00.43. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.
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. Luxchem Corporation Berhad paid out a comfortable 40% of its profit last year. 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. Over the past year it paid out 123% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
Luxchem Corporation Berhad does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.
Luxchem Corporation Berhad paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Luxchem Corporation Berhad's ability to maintain its dividend.
Check out our latest analysis for Luxchem Corporation Berhad
Click here to see how much of its profit Luxchem Corporation Berhad paid out over the last 12 months.
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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're not enthused to see that Luxchem Corporation Berhad'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. Luxchem Corporation Berhad has seen its dividend decline 2.4% per annum on average over the past 10 years, which is not great to see.
Final Takeaway
Is Luxchem Corporation Berhad worth buying for its dividend? It's disappointing to see earnings per share have fallen slightly, even though Luxchem Corporation Berhad is paying out less than half its income as dividends. It's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Luxchem Corporation Berhad. Every company has risks, and we've spotted 2 warning signs for Luxchem Corporation Berhad (of which 1 is concerning!) you should know about.
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.