Wang-Zheng Berhad (KLSE:WANGZNG) will increase its dividend from last year's comparable payment on the 20th of June to MYR0.02. Even though the dividend went up, the yield is still quite low at only 2.2%.

See our latest analysis for Wang-Zheng Berhad

Wang-Zheng Berhad's Dividend Is Well Covered By Earnings

The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. Before making this announcement, Wang-Zheng Berhad was earning enough to cover the dividend, but it wasn't generating any free cash flows. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.

Unless the company can turn things around, EPS could fall by 6.7% over the next year. Assuming the dividend continues along recent trends, we believe the payout ratio could be 46%, which we are pretty comfortable with and we think is feasible on an earnings basis.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The dividend has gone from an annual total of MYR0.02 in 2014 to the most recent total annual payment of MYR0.015. The dividend has shrunk at around 2.8% a year during that period. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.

Dividend Growth Is Doubtful

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It's not great to see that Wang-Zheng Berhad's earnings per share has fallen at approximately 6.7% per year over the past five years. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits.

Wang-Zheng Berhad's Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think Wang-Zheng Berhad's payments are rock solid. While Wang-Zheng Berhad is earning enough to cover the payments, the cash flows are lacking. Overall, we don't think this company has the makings of a good income stock.

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 identified 4 warning signs for Wang-Zheng Berhad (2 don't sit too well with us!) that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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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.