We Wouldn't Be Too Quick To Buy Eisai Co., Ltd. (TSE:4523) Before It Goes Ex-Dividend
Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Eisai Co., Ltd. (TSE:4523) is about to go ex-dividend in just 3 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 Eisai's shares before the 29th of September in order to be eligible for the dividend, which will be paid on the 18th of November.
The company's next dividend payment will be JP¥80.00 per share, and in the last 12 months, the company paid a total of JP¥160 per share. Based on the last year's worth of payments, Eisai stock has a trailing yield of around 3.3% on the current share price of JP¥4902.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Last year, Eisai paid out 107% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out an unsustainably high 246% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how Eisai intends to continue funding this dividend, or if it could be forced to cut the payment.
Cash is slightly more important than profit from a dividend perspective, but given Eisai's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.
View our latest analysis for Eisai
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's not encouraging to see that Eisai's earnings are effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share. With limited earnings growth and paying out a concerningly high percentage of its earnings, the prospects of future dividend growth don't look so bright here.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Eisai has delivered an average of 0.6% per year annual increase in its dividend, based on the past 10 years of dividend payments.
The Bottom Line
Is Eisai worth buying for its dividend? Earnings per share are effectively flat, plus Eisai's dividend is not well covered by either earnings or cash flow, which is not great. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.
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 Eisai. Every company has risks, and we've spotted 1 warning sign for Eisai you should know about.
If you're in the market for strong dividend payers, we recommend checking our selection of top 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.