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Decide whether you should invest in Dutch Lady milk industries berhad or not. Explain in details...

Decide whether you should invest in Dutch Lady milk industries berhad or not. Explain in details (30m)

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Investors In Dutch Lady Milk Industries Berhad (KLSE:DLADY) Should Consider This, First

Dividend paying stocks like Dutch Lady Milk Industries Berhad (KLSE:DLADY) tend to be popular with investors, and for good reason – some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on the income from dividends, it’s important to be a lot more stringent with your investments than the average punter.

A slim 2.0% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Dutch Lady Milk Industries Berhad could have potential. There are a few simple ways to reduce the risks of buying Dutch Lady Milk Industries Berhad for its dividend,

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. In the last year, Dutch Lady Milk Industries Berhad paid out 60% of its profit as dividends. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Dutch Lady Milk Industries Berhad paid out a conservative 39% of its free cash flow as dividends last year. It’s positive to see that Dutch Lady Milk Industries Berhad’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

While the above analysis focuses on dividends relative to a company’s earnings, we do note Dutch Lady Milk Industries Berhad’s strong net cash position, which will let it pay larger dividends for a time, should it choose.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. For the purpose of this article, we only scrutinise the last decade of Dutch Lady Milk Industries Berhad’s dividend payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was RM0.2 in 2010, compared to RM0.8 last year. This works out to be a compound annual growth rate (CAGR) of approximately 17% a year over that time. Dutch Lady Milk Industries Berhad’s dividend payments have fluctuated, so it hasn’t grown 17% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

It’s not great to see that the payment has been cut in the past. We’re generally more wary of companies that have cut their dividend before, as they tend to perform worse in an economic downturn.

Dividend Growth Potential

With a relatively unstable dividend, it’s even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there’s a good chance of bigger dividends in future? Over the past five years, it looks as though Dutch Lady Milk Industries Berhad’s EPS have declined at around 2.7% a year. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company’s dividend.

Conclusion

Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Dutch Lady Milk Industries Berhad’s payout ratios are within a normal range for the average corporation, and we like that its cashflow was stronger than reported profits. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. While we’re not hugely bearish on it, overall we think there are potentially better dividend stocks than Dutch Lady Milk Industries Berhad out there.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we’ve picked out 1 warning sign for Dutch Lady Milk Industries Berhad that investors should know about before committing capital to this stock.


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