We Wouldn't Be Too Quick To Buy Daisan Co., Ltd. (TSE:4750) Before It Goes Ex-Dividend

It looks like Daisan Co., Ltd. (TSE:4750) is about to go ex-dividend in the next four 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Thus, you can purchase Daisan's shares before the 17th of October in order to receive the dividend, which the company will pay on the 26th of December.

The company's next dividend payment will be JP¥11.00 per share, on the back of last year when the company paid a total of JP¥22.00 to shareholders. Based on the last year's worth of payments, Daisan has a trailing yield of 3.8% on the current stock price of JP¥585.00. 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 check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Daisan

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Daisan paid out 128% 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. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (52%) of its free cash flow in the past year, which is within an average range for most companies.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Daisan 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. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit Daisan 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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're not enthused to see that Daisan's earnings per share have remained effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Daisan has seen its dividend decline 3.3% per annum on average over the past five years, which is not great to see.

The Bottom Line

Should investors buy Daisan for the upcoming dividend? Earnings per share have been flat in recent times, which is, we suppose, better than seeing them shrink. Plus, Daisan's paying out a high percentage of its earnings and more than half its cash flow. Bottom line: Daisan has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Although, if you're still interested in Daisan and want to know more, you'll find it very useful to know what risks this stock faces. Case in point: We've spotted 3 warning signs for Daisan you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.