Is It Smart To Buy MK Seiko Co., Ltd. (TYO:5906) Before It Goes Ex-Dividend?

It looks like MK Seiko Co., Ltd. (TYO:5906) is about to go ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 18th of March will not receive the dividend, which will be paid on the 17th of June.

MK Seiko's upcoming dividend is JP¥8.00 a share, following on from the last 12 months, when the company distributed a total of JP¥8.00 per share to shareholders. Last year's total dividend payments show that MK Seiko has a trailing yield of 1.4% on the current share price of ¥569. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether MK Seiko can afford its dividend, and if the dividend could grow.

View our latest analysis for MK Seiko

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. MK Seiko has a low and conservative payout ratio of just 16% 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. The good news is it paid out just 19% of its free cash flow in the last year.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see how much of its profit MK Seiko paid out over the last 12 months.

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. 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 encouraged by the steady growth at MK Seiko, with earnings per share up 9.4% on average over the last five years. Earnings per share have been increasing steadily and management is reinvesting almost all of the profits back into the business. This is an attractive combination, because when profits are reinvested effectively, growth can compound, with corresponding benefits for earnings and dividends in the future.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, MK Seiko has lifted its dividend by approximately 4.8% 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.

The Bottom Line

From a dividend perspective, should investors buy or avoid MK Seiko? Earnings per share have been growing moderately, and MK Seiko is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. It might be nice to see earnings growing faster, but MK Seiko is being conservative with its dividend payouts and could still perform reasonably over the long run. There's a lot to like about MK Seiko, and we would prioritise taking a closer look at it.

In light of that, while MK Seiko has an appealing dividend, it's worth knowing the risks involved with this stock. For instance, we've identified 4 warning signs for MK Seiko (1 doesn't sit too well with us) you should be aware of.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. 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.
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