Read this before considering AME Elite Consortium Berhad (KLSE:AME) for its upcoming RM00.04 dividend

AME Elite Consortium Berhad (KLSE:AME) is about to trade ex-dividend in 3 days. The ex-dividend date is one business day before the record date, which is the deadline by which shareholders must be on the company’s books to be eligible for a dividend payment. The ex-dividend date is important because each time a stock is bought or sold, the transaction takes at least two business days to settle. So, you can buy shares of AME Elite Consortium Berhad before June 20 in order to receive the dividend that the company will pay on July 12.

The company’s upcoming dividend is RM0.04 per share, following on from the last 12 months, when the company distributed a total of RM0.02 per share to shareholders. Calculating the last year’s payments shows that AME Elite Consortium Berhad has a trailing yield of 3.5% on the current stock price of RM01.71. Dividends are an important source of income for many shareholders, but the health of the company is essential to maintaining those dividends. So we need to consider whether AME Elite Consortium Berhad can afford to pay its dividend and whether it could increase.

Check out our latest analysis for AME Elite Consortium Berhad

If a company pays more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Fortunately, AME Elite Consortium Berhad’s payout ratio is modest, at just 41% of profits. Yet cash flow is even more important than earnings when evaluating a dividend. So we need to see if the company generated enough cash to pay its distribution. The company paid out 90% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Businesses generally need cash more than profits – expenses aren’t paid for themselves – so it’s not great to see them shelling out a large portion of their cash flow.

AME Elite Consortium Berhad paid less in dividends than in profits, but unfortunately it did not generate enough cash to cover the dividend. Cash is king, as they say, and if AME Elite Consortium Berhad repeatedly paid dividends that were not well covered by cash flow, we would consider that a warning sign.

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

Have profits and dividends increased?

Stocks of companies that generate sustainable earnings growth often offer the best dividend prospects because it is easier to increase the dividend when earnings are growing. If earnings fall enough, the company could be forced to cut its dividend. With this in mind, we are encouraged by AME Elite Consortium Berhad’s steady growth, with earnings per share up 9.5% on average over the past five years. Profits have been growing at a steady pace, but we’re concerned that dividend payments have consumed most of the company’s cash flow over the past year.

Many investors will evaluate a company’s dividend performance by evaluating how its dividend payments have changed over time. AME Elite Consortium Berhad has generated an average annual increase of 32% per year in its dividend, based on the last four years of dividend payments. We’re pleased to see dividends growing alongside earnings over several years, which could be a sign that the company intends to share the growth with shareholders.

To summarize

Should investors buy AME Elite Consortium Berhad for the upcoming dividend? AME Elite Consortium Berhad has seen its earnings per share grow steadily and paid out less than half of its profits over the last year. Unfortunately, its dividend was not well covered by free cash flow. Overall, it’s not a bad combination, but we think there are probably more attractive dividend prospects out there.

However, if you are still interested in AME Elite Consortium Berhad as a potential investment, you should definitely consider some of the risks associated with AME Elite Consortium Berhad. Our analysis shows 1 warning sign for AME Elite Consortium Berhad and you should be aware of this before buying stocks.

A common investing mistake is buying the first interesting stock you see. Here you can find a complete list of high-yielding dividend stocks.

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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 constitute financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your objectives or your financial situation. Our goal is to provide you with targeted, long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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