Should You Buy Muhibbah Engineering (M) Bhd. (KLSE:MUHIBAH) For Its Upcoming Dividend?
Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Muhibbah Engineering (M) Bhd. (KLSE:MUHIBAH) is about to go ex-dividend in just 3 days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled 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. In other words, investors can purchase Muhibbah Engineering (M) Bhd's shares before the 20th of August in order to be eligible for the dividend, which will be paid on the 9th of September.
The company's upcoming dividend is RM00.035 a share, following on from the last 12 months, when the company distributed a total of RM0.035 per share to shareholders. Based on the last year's worth of payments, Muhibbah Engineering (M) Bhd has a trailing yield of 6.7% on the current stock price of RM00.525. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. 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. Fortunately Muhibbah Engineering (M) Bhd's payout ratio is modest, at just 33% of profit. A useful secondary check can be to evaluate whether Muhibbah Engineering (M) Bhd generated enough free cash flow to afford its dividend. It distributed 30% of its free cash flow as dividends, a comfortable payout level for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
View our latest analysis for Muhibbah Engineering (M) Bhd
Click here to see how much of its profit Muhibbah Engineering (M) Bhd paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's encouraging to see Muhibbah Engineering (M) Bhd has grown its earnings rapidly, up 82% a year for the past five years. Earnings per share have been growing very quickly, and the company is paying out a relatively low percentage of its profit and cash flow. Companies with growing earnings and low payout ratios are often the best long-term dividend stocks, as the company can both grow its earnings and increase the percentage of earnings that it pays out, essentially multiplying the dividend.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Muhibbah Engineering (M) Bhd's dividend payments per share have declined at 3.5% per year on average over the past 10 years, which is uninspiring. Muhibbah Engineering (M) Bhd is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
The Bottom Line
Has Muhibbah Engineering (M) Bhd got what it takes to maintain its dividend payments? It's great that Muhibbah Engineering (M) Bhd is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. Overall we think this is an attractive combination and worthy of further research.
In light of that, while Muhibbah Engineering (M) Bhd has an appealing dividend, it's worth knowing the risks involved with this stock. Be aware that Muhibbah Engineering (M) Bhd is showing 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...
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.