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Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Nestlé (Malaysia) Berhad (KLSE:NESTLE) is about to trade ex-dividend in the next 4 days. Typically, the ex-dividend date is one business day 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. This means that investors who purchase Nestlé (Malaysia) Berhad’s shares on or after the 5th of September will not receive the dividend, which will be paid on the 5th of October.
The company’s upcoming dividend is RM0.70 a share, following on from the last 12 months, when the company distributed a total of RM2.62 per share to shareholders. Looking at the last 12 months of distributions, Nestlé (Malaysia) Berhad has a trailing yield of approximately 2.0% on its current stock price of MYR130.5. 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.
Check out our latest analysis for Nestlé (Malaysia) Berhad
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Nestlé (Malaysia) Berhad paid out 99% of its earnings, which is more than we’re comfortable with, unless there are mitigating circumstances. A useful secondary check can be to evaluate whether Nestlé (Malaysia) Berhad generated enough free cash flow to afford its dividend. Over the past year it paid out 115% of its free cash flow as dividends, which is uncomfortably 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.
Cash is slightly more important than profit from a dividend perspective, but given Nestlé (Malaysia) Berhad’s payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we’re not enthused to see that Nestlé (Malaysia) Berhad’s earnings per share have remained effectively flat over the past five years. We’d take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Nestlé (Malaysia) Berhad has lifted its dividend by approximately 2.2% a year on average.
The Bottom Line
From a dividend perspective, should investors buy or avoid Nestlé (Malaysia) Berhad? It’s been unable to generate earnings growth, yet is paying out an uncomfortably high percentage of both its profits (99%) and cash flow (115%) as dividends. Bottom line: Nestlé (Malaysia) Berhad has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
Although, if you’re still interested in Nestlé (Malaysia) Berhad and want to know more, you’ll find it very useful to know what risks this stock faces. For example, we’ve found 2 warning signs for Nestlé (Malaysia) Berhad (1 is concerning!) that deserve your attention before investing in the shares.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
Valuation is complex, but we’re helping make it simple.
Find out whether Nestlé (Malaysia) Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
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