Don't Buy EBARA Foods Industry,Inc. (TSE:2819) For Its Next Dividend Without Doing These Checks
It looks like EBARA Foods Industry,Inc. (TSE:2819) is about to go ex-dividend in the next 3 days. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase EBARA Foods IndustryInc's shares before the 29th of September to receive the dividend, which will be paid on the 7th of December.
The company's next dividend payment will be JP¥25.00 per share, on the back of last year when the company paid a total of JP¥50.00 to shareholders. Last year's total dividend payments show that EBARA Foods IndustryInc has a trailing yield of 2.0% on the current share price of JP¥2484.00. If you buy this business for its dividend, you should have an idea of whether EBARA Foods IndustryInc's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. EBARA Foods IndustryInc has a low and conservative payout ratio of just 20% of its income after tax. 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. EBARA Foods IndustryInc paid out more free cash flow than it generated - 127%, to be precise - last year, which we think is concerningly 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.
EBARA Foods IndustryInc 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.
EBARA Foods IndustryInc paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were EBARA Foods IndustryInc to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
Check out our latest analysis for EBARA Foods IndustryInc
Click here to see how much of its profit EBARA Foods IndustryInc paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're not enthused to see that EBARA Foods IndustryInc's earnings per share have remained 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.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, EBARA Foods IndustryInc has increased its dividend at approximately 6.4% a year on average.
Final Takeaway
Is EBARA Foods IndustryInc an attractive dividend stock, or better left on the shelf? It's disappointing to see earnings per share have fallen slightly, even though EBARA Foods IndustryInc is paying out less than half its income as dividends. It's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Although, if you're still interested in EBARA Foods IndustryInc and want to know more, you'll find it very useful to know what risks this stock faces. For example, EBARA Foods IndustryInc has 2 warning signs (and 1 which is significant) we think 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.