It Might Not Be A Great Idea To Buy AGC Inc. (TSE:5201) For Its Next Dividend

AGC Inc. (TSE:5201) is about to trade ex-dividend in the next three 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. This means that investors who purchase AGC's shares on or after the 27th of December will not receive the dividend, which will be paid on the 31st of March.

The company's upcoming dividend is JP¥105.00 a share, following on from the last 12 months, when the company distributed a total of JP¥210 per share to shareholders. Last year's total dividend payments show that AGC has a trailing yield of 4.6% on the current share price of JP¥4554.00. If you buy this business for its dividend, you should have an idea of whether AGC's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for AGC

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. AGC paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If AGC didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. AGC paid out more free cash flow than it generated - 132%, to be precise - last year, which we think is concerningly 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.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. AGC reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, AGC has increased its dividend at approximately 8.8% a year on average.

Remember, you can always get a snapshot of AGC's financial health, by checking our visualisation of its financial health, here.

The Bottom Line

Should investors buy AGC for the upcoming dividend? It's hard to get used to AGC paying a dividend despite reporting a loss over the past year. Worse, the dividend was not well covered by cash flow. It's not that we think AGC is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in AGC despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Case in point: We've spotted 1 warning sign for AGC 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.