Read This Before Considering Hitachi Construction Machinery Co., Ltd. (TSE:6305) For Its Upcoming JP¥65.00 Dividend

Hitachi Construction Machinery Co., Ltd. (TSE:6305) stock is about to trade ex-dividend in 4 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 because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase Hitachi Construction Machinery's shares before the 27th of September in order to be eligible for the dividend, which will be paid on the 2nd of December.

The company's next dividend payment will be JP¥65.00 per share, and in the last 12 months, the company paid a total of JP¥175 per share. Based on the last year's worth of payments, Hitachi Construction Machinery stock has a trailing yield of around 5.0% on the current share price of JP¥3500.00. If you buy this business for its dividend, you should have an idea of whether Hitachi Construction Machinery's dividend is reliable and sustainable. So we need to investigate whether Hitachi Construction Machinery can afford its dividend, and if the dividend could grow.

See our latest analysis for Hitachi Construction Machinery

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 Hitachi Construction Machinery paying out a modest 33% of its earnings. A useful secondary check can be to evaluate whether Hitachi Construction Machinery generated enough free cash flow to afford its dividend. Over the last year, it paid out more than three-quarters (82%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's positive to see that Hitachi Construction Machinery's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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. 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 encouraged by the steady growth at Hitachi Construction Machinery, with earnings per share up 7.3% on average over the last five years. Decent historical earnings per share growth suggests Hitachi Construction Machinery has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. Therefore it's unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Hitachi Construction Machinery has lifted its dividend by approximately 13% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Final Takeaway

Is Hitachi Construction Machinery worth buying for its dividend? Earnings per share growth has been modest, and it's interesting that Hitachi Construction Machinery is paying out less than half of its earnings and more than half its cash flow to shareholders in the form of dividends. Overall, it's hard to get excited about Hitachi Construction Machinery from a dividend perspective.

On that note, you'll want to research what risks Hitachi Construction Machinery is facing. We've identified 2 warning signs with Hitachi Construction Machinery (at least 1 which shouldn't be ignored), 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.

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.