Here's Why We're Wary Of Buying JDC's (TSE:1887) For Its Upcoming Dividend

JDC Corporation (TSE:1887) stock is about to trade ex-dividend in 4 days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled 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. Therefore, if you purchase JDC's shares on or after the 29th of May, you won't be eligible to receive the dividend, when it is paid on the 28th of August.

The company's next dividend payment will be JP¥12.00 per share, and in the last 12 months, the company paid a total of JP¥22.00 per share. Calculating the last year's worth of payments shows that JDC has a trailing yield of 4.6% on the current share price of JP¥482.00. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.

We've discovered 3 warning signs about JDC. View them for free.

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. An unusually high payout ratio of 277% of its profit suggests something is happening other than the usual distribution of profits to shareholders. A useful secondary check can be to evaluate whether JDC generated enough free cash flow to afford its dividend. Dividends consumed 74% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's good to see that while JDC's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

See our latest analysis for JDC

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. JDC's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 45% a year over the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. JDC has seen its dividend decline 3.9% per annum on average over the past six years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

Final Takeaway

Should investors buy JDC for the upcoming dividend? Earnings per share have been shrinking in recent times. What's more, JDC is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of JDC.

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 JDC. For example, we've found 3 warning signs for JDC (1 makes us a bit uncomfortable!) that deserve your attention before investing in the shares.

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.