Don't Buy Nippon Filcon Co., Ltd. (TSE:5942) For Its Next Dividend Without Doing These Checks

Readers hoping to buy Nippon Filcon Co., Ltd. (TSE:5942) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase Nippon Filcon's shares before the 29th of May in order to be eligible for the dividend, which will be paid on the 1st of August.

The company's next dividend payment will be JP¥14.00 per share, and in the last 12 months, the company paid a total of JP¥28.00 per share. Calculating the last year's worth of payments shows that Nippon Filcon has a trailing yield of 5.5% on the current share price of JP¥513.00. 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.

We've discovered 3 warning signs about Nippon Filcon. View them for free.

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. Last year, Nippon Filcon paid out 106% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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 last year, it paid out dividends equivalent to 255% of what it generated in free cash flow, a disturbingly high percentage. Our definition of free cash flow excludes cash generated from asset sales, so since Nippon Filcon is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

Cash is slightly more important than profit from a dividend perspective, but given Nippon Filcon's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

See our latest analysis for Nippon Filcon

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

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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see Nippon Filcon's earnings have been skyrocketing, up 35% per annum for the past five years. Earnings per share are increasing at a rapid rate, but the company is paying out more than we are comfortable with, based on current earnings. Generally, when a company is growing this quickly and paying out all of its earnings as dividends, it can suggest either that the company is borrowing heavily to fund its growth, or that earnings growth is likely to slow due to lack of reinvestment.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Nippon Filcon has delivered an average of 17% per year annual increase in its dividend, based on the past 10 years of dividend payments. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

Final Takeaway

Is Nippon Filcon an attractive dividend stock, or better left on the shelf? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. 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 in mind though, if the poor dividend characteristics of Nippon Filcon don't faze you, it's worth being mindful of the risks involved with this business. To help with this, we've discovered 3 warning signs for Nippon Filcon (1 shouldn't be ignored!) that you ought to be aware of before buying the shares.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.