We Wouldn't Be Too Quick To Buy Nihon Kagaku Sangyo Co., Ltd. (TSE:4094) 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 Nihon Kagaku Sangyo Co., Ltd. (TSE:4094) is about to go ex-dividend in just 3 days. The ex-dividend date is commonly two business days before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, Nihon Kagaku Sangyo investors that purchase the stock on or after the 29th of September will not receive the dividend, which will be paid on the 8th of December.
The company's next dividend payment will be JP¥45.00 per share, on the back of last year when the company paid a total of JP¥90.00 to shareholders. Based on the last year's worth of payments, Nihon Kagaku Sangyo has a trailing yield of 4.0% on the current stock price of JP¥2276.00. 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 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. It paid out 79% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be worried about the risk of a drop in earnings. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out 100% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.
Nihon Kagaku Sangyo 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.
Nihon Kagaku Sangyo paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Nihon Kagaku Sangyo's ability to maintain its dividend.
Check out our latest analysis for Nihon Kagaku Sangyo
Click here to see how much of its profit Nihon Kagaku Sangyo paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Nihon Kagaku Sangyo earnings per share are up 4.5% per annum over the last five years. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Nihon Kagaku Sangyo has increased its dividend at approximately 16% a year on average. 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.
Final Takeaway
Is Nihon Kagaku Sangyo an attractive dividend stock, or better left on the shelf? Earnings per share have grown somewhat, although Nihon Kagaku Sangyo paid out over half its profits and the dividend was not well covered by free cash flow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.
So if you're still interested in Nihon Kagaku Sangyo despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Be aware that Nihon Kagaku Sangyo is showing 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...
A common investing mistake is buying the first interesting stock you see. Here you can find a full 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.