Why It Might Not Make Sense To Buy HPP Holdings Berhad (KLSE:HPPHB) For Its Upcoming Dividend

Readers hoping to buy HPP Holdings Berhad (KLSE:HPPHB) 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. This means that investors who purchase HPP Holdings Berhad's shares on or after the 12th of November will not receive the dividend, which will be paid on the 27th of November.

The company's upcoming dividend is RM00.0075 a share, following on from the last 12 months, when the company distributed a total of RM0.01 per share to shareholders. Based on the last year's worth of payments, HPP Holdings Berhad has a trailing yield of 5.4% on the current stock price of RM00.28. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether HPP Holdings Berhad has been able to grow its dividends, or if the dividend might be cut.

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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. HPP Holdings Berhad distributed an unsustainably high 113% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Dividends consumed 70% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and HPP Holdings Berhad fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

See our latest analysis for HPP Holdings Berhad

Click here to see how much of its profit HPP Holdings Berhad paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by HPP Holdings Berhad's 21% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. HPP Holdings Berhad's dividend payments per share have declined at 4.7% per year on average over the past six years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

Final Takeaway

Is HPP Holdings Berhad an attractive dividend stock, or better left on the shelf? It's never fun to see a company's earnings per share in retreat. What's more, HPP Holdings Berhad is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that being said, if you're still considering HPP Holdings Berhad as an investment, you'll find it beneficial to know what risks this stock is facing. For instance, we've identified 4 warning signs for HPP Holdings Berhad (2 are a bit unpleasant) you should be aware of.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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