It Might Not Be A Great Idea To Buy Tenaga Nasional Berhad (KLSE:TENAGA) For Its Next Dividend
Tenaga Nasional Berhad (KLSE:TENAGA) stock is about to trade ex-dividend in three days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. Meaning, you will need to purchase Tenaga Nasional Berhad's shares before the 30th of March to receive the dividend, which will be paid on the 14th of April.
The company's next dividend payment will be RM0.26 per share. Last year, in total, the company distributed RM0.46 to shareholders. Based on the last year's worth of payments, Tenaga Nasional Berhad has a trailing yield of 4.8% on the current stock price of MYR9.54. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
View our latest analysis for Tenaga Nasional Berhad
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. Its dividend payout ratio is 76% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be worried about the risk of a drop in earnings. A useful secondary check can be to evaluate whether Tenaga Nasional Berhad generated enough free cash flow to afford its dividend. Over the last year, it paid out dividends equivalent to 277% of what it generated in free cash flow, a disturbingly high percentage. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.
While Tenaga Nasional Berhad's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Tenaga Nasional Berhad's ability to maintain its dividend.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Tenaga Nasional Berhad's earnings per share have fallen at approximately 15% a year over the previous 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. In the last 10 years, Tenaga Nasional Berhad has lifted its dividend by approximately 16% a year on average. 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. Tenaga Nasional Berhad is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
The Bottom Line
Has Tenaga Nasional Berhad got what it takes to maintain its dividend payments? Tenaga Nasional Berhad had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not that we think Tenaga Nasional Berhad is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Tenaga Nasional Berhad. We've identified 3 warning signs with Tenaga Nasional Berhad (at least 1 which is concerning), and understanding these should be part of your investment process.
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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