Is It Worth Considering Tess Holdings Co.,Ltd. (TSE:5074) For Its Upcoming Dividend?

It looks like Tess Holdings Co.,Ltd. (TSE:5074) is about to go ex-dividend in the next three 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. 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. Accordingly, Tess HoldingsLtd investors that purchase the stock on or after the 27th of June will not receive the dividend, which will be paid on the 1st of July.

The company's next dividend payment will be JP¥16.00 per share, on the back of last year when the company paid a total of JP¥16.00 to shareholders. Based on the last year's worth of payments, Tess HoldingsLtd has a trailing yield of 3.7% on the current stock price of JP¥427.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Tess HoldingsLtd

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. That's why it's good to see Tess HoldingsLtd paying out a modest 44% of its earnings. A useful secondary check can be to evaluate whether Tess HoldingsLtd generated enough free cash flow to afford its dividend. Over the last year, it paid out dividends equivalent to 264% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how Tess HoldingsLtd intends to continue funding this dividend, or if it could be forced to cut the payment.

Tess HoldingsLtd 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 Tess HoldingsLtd to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. It's encouraging to see Tess HoldingsLtd has grown its earnings rapidly, up 103% a year for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Tess HoldingsLtd also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Tess HoldingsLtd's dividend payments per share have declined at 8.0% per year on average over the past three years, which is uninspiring. Tess HoldingsLtd is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

To Sum It Up

Is Tess HoldingsLtd worth buying for its dividend? We're glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it's not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we're not all that optimistic on its dividend prospects.

In light of that, while Tess HoldingsLtd has an appealing dividend, it's worth knowing the risks involved with this stock. We've identified 5 warning signs with Tess HoldingsLtd (at least 3 which are concerning), and understanding these should be part of your investment process.

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.

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