We Wouldn't Be Too Quick To Buy Yahagi Construction Co.,Ltd. (TSE:1870) Before It Goes Ex-Dividend

It looks like Yahagi Construction Co.,Ltd. (TSE:1870) is about to go ex-dividend in the next 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase Yahagi ConstructionLtd's shares before the 28th of March in order to be eligible for the dividend, which will be paid on the 6th of June.

The company's next dividend payment will be JP¥40.00 per share. Last year, in total, the company distributed JP¥60.00 to shareholders. Based on the last year's worth of payments, Yahagi ConstructionLtd stock has a trailing yield of around 4.4% on the current share price of JP¥1360.00. If you buy this business for its dividend, you should have an idea of whether Yahagi ConstructionLtd's dividend is reliable and sustainable. So we need to investigate whether Yahagi ConstructionLtd can afford its dividend, and if the dividend could grow.

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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. Last year Yahagi ConstructionLtd paid out 102% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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. Fortunately, it paid out only 46% of its free cash flow in the past year.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Yahagi ConstructionLtd fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

See our latest analysis for Yahagi ConstructionLtd

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Yahagi ConstructionLtd's earnings per share have fallen at approximately 11% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Yahagi ConstructionLtd has delivered an average of 16% per year annual increase in its dividend, based on the past 10 years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Yahagi ConstructionLtd is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

Is Yahagi ConstructionLtd worth buying for its dividend? It's not a great combination to see a company with earnings in decline and paying out 102% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Yahagi ConstructionLtd's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Yahagi ConstructionLtd.

With that being said, if you're still considering Yahagi ConstructionLtd as an investment, you'll find it beneficial to know what risks this stock is facing. For example, we've found 2 warning signs for Yahagi ConstructionLtd that we recommend you consider before investing in the business.

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.