Dividend investors: don’t be too quick to buy Scicom (MSC) Berhad (KLSE: SCICOM) for its next dividend

It looks like Scicom (MSC) Berhad (KLSE: SCICOM) is about to be ex-dividend in the next 4 days. The ex-dividend date is a business day before a company’s registration date, which is the date the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is an important date to know, as any purchase of shares made on or after that date may mean a late settlement that does not appear on the record date. As a result, investors in Scicom (MSC) Berhad who buy the shares on or after June 14 will not receive the dividend, which will be paid on June 29.

The company’s next dividend payment will be RM 0.015 per share, compared to last year when the company paid a total of RM 0.05 to shareholders. Looking at the last 12 months of distributions, Scicom (MSC) Berhad has a sliding return of around 4.5% on its current price of MYR 1.12. Dividends are an important source of income for many shareholders, but the health of the business is crucial to sustaining these dividends. So we need to determine whether Scicom (MSC) Berhad can afford its dividend and whether the dividend could increase.

Check out our latest analysis for Scicom (MSC) Berhad

Dividends are usually paid out of business income, so if a business pays more than it earned, its dividend is usually at risk of being reduced. Its dividend payout ratio is 81% of profits, which means the company pays out the majority of its profits. The relatively limited reinvestment of earnings could slow the rate of future earnings growth. This could become a concern if profits start to decline. Yet cash flow is still more important than earnings in valuing a dividend, so we need to see if the company has generated enough cash to pay for its distribution. In the past year, it has paid more than three-quarters (82%) of its generated free cash flow, which is quite high and could start to limit reinvestment in the business.

It is encouraging to see that the dividend is covered by both earnings and cash flow. This usually suggests that the dividend is sustainable, as long as profits don’t drop sharply.

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

Historic KLSE dividend: SCICOM June 9, 2021

Have profits and dividends increased?

Companies with declining profits are tricky from a dividend standpoint. If profits fall enough, the company could be forced to cut its dividend. With that in mind, we are hampered by the 7.0% per annum drop in profits of Scicom (MSC) Berhad over the past five years. Ultimately, when earnings per share declines, the size of the pie from which dividends can be paid declines.

Most investors primarily assess a company’s dividend prospects by checking the historical rate of dividend growth. Since our data began 10 years ago, Scicom (MSC) Berhad has increased its dividend by around 13% per year on average. The only way to pay higher dividends when profits go down is to pay a higher percentage of profits, spend money on the balance sheet, or borrow money. Scicom (MSC) Berhad is already paying out 81% of its profits, and with declining profits, we believe this dividend is unlikely to grow quickly in the future.

Last takeaways

From a dividend perspective, should investors buy or avoid Scicom (MSC) Berhad? As earnings per share decline, it is encouraging to see that at least Scicom (MSC) Berhad’s dividend looks sustainable, with earnings and cash payout ratios that are within reason. This is not an attractive combination from a dividend standpoint, and we are inclined to forgo this one for the time being.

That being said, if you still view Scicom (MSC) Berhad as an investment, you’ll find it useful to know what risks this stock faces. In terms of investment risks, we have identified 2 warning signs with Scicom (MSC) Berhad and understanding them should be part of your investment process.

If you are in the dividend-paying stock market, we recommend that you check out our list of the highest dividend-paying stocks with a yield above 2% and a future dividend.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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