Don't Race Out To Buy Mr D.I.Y. Group (M) Berhad (KLSE:MRDIY) Just Because It's Going Ex-Dividend
Readers hoping to buy Mr D.I.Y. Group (M) Berhad (KLSE:MRDIY) 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. 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. Meaning, you will need to purchase Mr D.I.Y. Group (M) Berhad's shares before the 24th of August to receive the dividend, which will be paid on the 8th of September.
The company's upcoming dividend is RM00.013 a share, following on from the last 12 months, when the company distributed a total of RM0.08 per share to shareholders. Calculating the last year's worth of payments shows that Mr D.I.Y. Group (M) Berhad has a trailing yield of 5.3% on the current share price of RM01.51. 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.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Mr D.I.Y. Group (M) Berhad paid out 121% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. A useful secondary check can be to evaluate whether Mr D.I.Y. Group (M) Berhad generated enough free cash flow to afford its dividend. Over the last year, it paid out more than three-quarters (89%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.
It's good to see that while Mr D.I.Y. Group (M) Berhad's dividends were not covered by profits, at least they are affordable from a cash perspective. 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.
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Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Mr D.I.Y. Group (M) Berhad's earnings per share have fallen at approximately 13% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Mr D.I.Y. Group (M) Berhad has delivered an average of 27% per year annual increase in its dividend, based on the past six years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Mr D.I.Y. Group (M) Berhad is already paying out 121% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
To Sum It Up
From a dividend perspective, should investors buy or avoid Mr D.I.Y. Group (M) Berhad? Earnings per share have been in decline, which is not encouraging. Worse, Mr D.I.Y. Group (M) Berhad's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.
So if you're still interested in Mr D.I.Y. Group (M) Berhad despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example, we've found 1 warning sign for Mr D.I.Y. Group (M) Berhad that we recommend you consider before investing in the business.
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.