Here’s why we’re hesitant to buy IJM Corporation Berhad (KLSE: IJM) for its upcoming dividend

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Looks like IJM Corporation Berhad (KLSE:IJM) is set to go ex-dividend in the next four days. The ex-dividend date is usually one business day before the record date which is the latest date by which you must be present on the books of the company as a shareholder in order to receive the dividend. The ex-dividend date is important because the settlement process involves two full business days. So if you miss this date, you will not be on the company’s books as of the record date. This means that investors who buy shares of IJM Corporation Berhad on or after June 29 will not receive the dividend, which will be paid on July 22.

The company’s next dividend is RM0.04 per share, following the last 12 months when the company distributed a total of RM0.06 per share to shareholders. Based on last year’s payouts, IJM Corporation Berhad has a yield of 3.5% on the current share price of MYR 1.72. Dividends are a major contributor to investment returns for long-term holders, but only if the dividend continues to be paid. We therefore need to check whether dividend payments are covered and whether profits are increasing.

See our latest analysis for IJM Corporation Berhad

Dividends are usually paid out of company earnings, so if a company pays out more than it has earned, its dividend is usually at risk of being reduced. IJM Corporation Berhad paid out 211% of its profits as dividends last year, which makes us concerned that there is something we don’t fully understand about the business. That said, even very profitable companies can sometimes not generate enough cash to pay the dividend, so we should always check if the dividend is covered by cash flow. Fortunately, its dividend payouts only accounted for 27% of the free cash flow it generated, which is a comfortable payout ratio.

It’s good to see that even though IJM Corporation Berhad’s dividends weren’t covered by earnings, they are at least affordable from a cash flow perspective. If executives were to continue paying out more dividends than the company reported earnings, we would consider that a warning sign. Very few companies are able to sustainably pay dividends above their reported earnings.

Click here to see the company’s payout ratio, as well as analysts’ estimates of its future dividends.

KLSE: Historic IJM dividend June 24, 2022

Have earnings and dividends increased?

When earnings decline, dividend companies become much more difficult to analyze and to own safely. If business goes into a recession and the dividend is cut, the company could see its value drop precipitously. IJM Corporation Berhad’s earnings per share have fallen about 31% annually over the previous five years.

Many investors will gauge a company’s dividend yield by evaluating how much dividend payouts have changed over time. It appears that IJM Corporation Berhad’s dividends are largely the same as 10 years ago. If a company’s dividend remains stable while profits are falling, it is usually a sign that it is paying out a higher percentage of its profits. This can become unsustainable if revenues drop enough.

To sum up

Should investors buy IJM Corporation Berhad for the upcoming dividend? It is not a good combination to see a company with declining profits and pay out 211% of its profits, which could imply that the dividend may be reduced in the future. However, the cash payout ratio was much lower – good news from a dividend perspective – which makes us wonder why there is such a mismatch between revenue and cash flow. With the way things are developing from a dividend perspective, we would be inclined to avoid IJM Corporation Berhad.

With that in mind, if you don’t mind IJM Corporation Berhad’s low dividend characteristics, it’s worth keeping in mind the risks associated with this business. Every business has risks, and we’ve spotted 2 warning signs for IJM Corporation Berhad you should know.

A common investment mistake is to buy the first good stock you see. Here you can find a complete list of high yielding dividend stocks.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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