Don't Buy Nittoc Construction Co., Ltd. (TSE:1929) For Its Next Dividend Without Doing These Checks

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Nittoc Construction Co., Ltd. (TSE:1929) is about to trade ex-dividend in the next three days. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a 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. Therefore, if you purchase Nittoc Construction's shares on or after the 28th of March, you won't be eligible to receive the dividend, when it is paid on the 24th of June.

The company's next dividend payment will be JP¥26.00 per share, and in the last 12 months, the company paid a total of JP¥48.00 per share. Last year's total dividend payments show that Nittoc Construction has a trailing yield of 4.5% on the current share price of JP¥1065.00. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

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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. Nittoc Construction paid out 90% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. A useful secondary check can be to evaluate whether Nittoc Construction generated enough free cash flow to afford its dividend. Fortunately, it paid out only 38% of its free cash flow in the past year.

It's good to see that while Nittoc Construction's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

See our latest analysis for Nittoc Construction

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. So we're not too excited that Nittoc Construction's earnings are down 4.5% a year over the past five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Nittoc Construction has delivered 20% dividend growth per year on average over the past 10 years. 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. Nittoc Construction is already paying out 90% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Is Nittoc Construction worth buying for its dividend? It's never great to see earnings per share declining, especially when a company is paying out 90% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Nittoc Construction's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not that we think Nittoc Construction is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Nittoc Construction and want to know more, you'll find it very useful to know what risks this stock faces. For example - Nittoc Construction has 1 warning sign we think you should be aware of.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.