Dividend Investors: Don't Be Too Quick To Buy DIP Corporation (TSE:2379) For Its Upcoming Dividend
Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see DIP Corporation (TSE:2379) is about to trade ex-dividend in the next four days. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase DIP's shares before the 28th of August in order to be eligible for the dividend, which will be paid on the 17th of November.
The company's next dividend payment will be JP¥48.00 per share, and in the last 12 months, the company paid a total of JP¥97.00 per share. Last year's total dividend payments show that DIP has a trailing yield of 5.2% on the current share price of JP¥1880.00. 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.
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. DIP distributed an unsustainably high 116% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the past year it paid out 137% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
DIP does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.
As DIP's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
See our latest analysis for DIP
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's comforting to see DIP's earnings have been skyrocketing, up 49% per annum for the past five years. Earnings per share have been growing rapidly, but the company is paying out an uncomfortably high percentage of its earnings as dividends. Generally, when a company is growing this quickly and paying out all of its earnings as dividends, it can suggest either that the company is borrowing heavily to fund its growth, or that earnings growth is likely to slow due to lack of reinvestment.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. DIP has delivered 9.5% dividend growth per year on average over the past nine years. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
To Sum It Up
Is DIP an attractive dividend stock, or better left on the shelf? While it's nice to see earnings per share growing, we're curious about how DIP intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. Bottom line: DIP has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
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 DIP. Be aware that DIP is showing 2 warning signs in our investment analysis, and 1 of those can't be ignored...
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.
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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.