Dividend Investors: Don't Be Too Quick To Buy EPCO Co.,Ltd. (TSE:2311) For Its Upcoming Dividend

EPCO Co.,Ltd. (TSE:2311) stock is about to trade ex-dividend in 4 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 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. In other words, investors can purchase EPCOLtd's shares before the 27th of June in order to be eligible for the dividend, which will be paid on the 3rd of September.

The company's next dividend payment will be JP¥14.00 per share, on the back of last year when the company paid a total of JP¥32.00 to shareholders. Based on the last year's worth of payments, EPCOLtd stock has a trailing yield of around 4.4% on the current share price of JP¥732.00. 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 EPCOLtd 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. It paid out 79% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be worried about the risk of a drop in earnings. 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. Over the past year it paid out 115% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

EPCOLtd does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

EPCOLtd paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to EPCOLtd's ability to maintain its dividend.

Check out our latest analysis for EPCOLtd

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. So we're not too excited that EPCOLtd's earnings are down 3.4% 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. Since the start of our data, 10 years ago, EPCOLtd has lifted its dividend by approximately 1.5% a year on average.

The Bottom Line

Has EPCOLtd got what it takes to maintain its dividend payments? EPCOLtd had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. Bottom line: EPCOLtd has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering EPCOLtd as an investment, you'll find it beneficial to know what risks this stock is facing. For example, EPCOLtd has 4 warning signs (and 1 which is significant) we think you should know about.

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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.