It Might Not Be A Great Idea To Buy Seikitokyu Kogyo Co., Ltd. (TSE:1898) For Its Next 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 Seikitokyu Kogyo Co., Ltd. (TSE:1898) is about to go ex-dividend in just three days. The ex-dividend date is usually set to be one business day 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 important as the process of settlement involves 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 Seikitokyu Kogyo's shares on or after the 27th of September, you won't be eligible to receive the dividend, when it is paid on the 4th of December.

The company's next dividend payment will be JP¥45.00 per share, and in the last 12 months, the company paid a total of JP¥90.00 per share. Last year's total dividend payments show that Seikitokyu Kogyo has a trailing yield of 5.7% on the current share price of JP¥1582.00. 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! So we need to investigate whether Seikitokyu Kogyo can afford its dividend, and if the dividend could grow.

View our latest analysis for Seikitokyu Kogyo

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. Seikitokyu Kogyo paid out 115% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. 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. Fortunately, it paid out only 34% 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 Seikitokyu Kogyo 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.

Click here to see how much of its profit Seikitokyu Kogyo 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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That explains why we're not overly excited about Seikitokyu Kogyo's flat earnings 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. Since the start of our data, 10 years ago, Seikitokyu Kogyo has lifted its dividend by approximately 25% a year on average.

The Bottom Line

Is Seikitokyu Kogyo an attractive dividend stock, or better left on the shelf? Along with flat earnings per share, Seikitokyu Kogyo paid out an uncomfortably high percentage of its earnings. It paid out a lower percentage of its free cash flow. It's not that we think Seikitokyu Kogyo is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Seikitokyu Kogyo and want to know more, you'll find it very useful to know what risks this stock faces. Our analysis shows 2 warning signs for Seikitokyu Kogyo that we strongly recommend you have a look at before investing in the company.

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.