Don't Buy Poh Huat Resources Holdings Berhad (KLSE:POHUAT) For Its Next Dividend Without Doing These Checks
The company's next dividend payment will be RM00.02 per share, and in the last 12 months, the company paid a total of RM0.08 per share. Based on the last year's worth of payments, Poh Huat Resources Holdings Berhad stock has a trailing yield of around 8.1% on the current share price of RM00.985. If you buy this business for its dividend, you should have an idea of whether Poh Huat Resources Holdings Berhad's dividend is reliable and sustainable. As a result, readers should always check whether Poh Huat Resources Holdings Berhad has been able to grow its dividends, or if the dividend might be cut.
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Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year Poh Huat Resources Holdings Berhad paid out 97% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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. Poh Huat Resources Holdings Berhad paid out more free cash flow than it generated - 138%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
Poh Huat Resources Holdings 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.
Cash is slightly more important than profit from a dividend perspective, but given Poh Huat Resources Holdings Berhad's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
See our latest analysis for Poh Huat Resources Holdings Berhad
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
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. With that in mind, we're discomforted by Poh Huat Resources Holdings Berhad's 18% 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. Poh Huat Resources Holdings Berhad has delivered 12% dividend growth per year on average over the past 10 years. 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. Poh Huat Resources Holdings Berhad is already paying out 97% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
Has Poh Huat Resources Holdings Berhad got what it takes to maintain its dividend payments? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (97%) and cash flow as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Although, if you're still interested in Poh Huat Resources Holdings Berhad and want to know more, you'll find it very useful to know what risks this stock faces. We've identified 3 warning signs with Poh Huat Resources Holdings Berhad (at least 1 which is a bit unpleasant), and understanding them should be part of your investment process.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.
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