Don't Race Out To Buy EPCO Co.,Ltd. (TSE:2311) Just Because It's Going Ex-Dividend

EPCO Co.,Ltd. (TSE:2311) stock is about to trade ex-dividend in 3 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. In other words, investors can purchase EPCOLtd's shares before the 27th of December in order to be eligible for the dividend, which will be paid on the 27th of March.

The company's next dividend payment will be JP¥18.00 per share. Last year, in total, the company distributed JP¥32.00 to shareholders. Calculating the last year's worth of payments shows that EPCOLtd has a trailing yield of 4.1% on the current share price of JP¥789.00. 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 EPCOLtd can afford its dividend, and if the dividend could grow.

Check out our latest analysis for EPCOLtd

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. EPCOLtd paid out 67% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether EPCOLtd generated enough free cash flow to afford its dividend. Over the past year it paid out 147% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

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. Cash is king, as they say, and were EPCOLtd to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see EPCOLtd earnings per share are up 8.0% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

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, EPCOLtd has lifted its dividend by approximately 1.5% a year on average.

The Bottom Line

Is EPCOLtd worth buying for its dividend? Earnings per share have grown somewhat, although EPCOLtd paid out over half its profits and the dividend was not well covered by free cash flow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

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. To help with this, we've discovered 3 warning signs for EPCOLtd that you should be aware of before investing in their shares.

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.