Here's Why We're Wary Of Buying IDEC's (TSE:6652) For Its Upcoming Dividend

IDEC Corporation (TSE:6652) is about to trade ex-dividend in the next 3 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order 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. This means that investors who purchase IDEC's shares on or after the 27th of September will not receive the dividend, which will be paid on the 27th of November.

The company's upcoming dividend is JP¥65.00 a share, following on from the last 12 months, when the company distributed a total of JP¥130 per share to shareholders. Looking at the last 12 months of distributions, IDEC has a trailing yield of approximately 5.0% on its current stock price of JP¥2596.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether IDEC has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for IDEC

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. IDEC paid out 118% 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. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the past year it paid out 130% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

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

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

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's not encouraging to see that IDEC's earnings are effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, IDEC has lifted its dividend by approximately 16% a year on average.

Final Takeaway

Has IDEC got what it takes to maintain its dividend payments? Not only are earnings per share flat, but IDEC is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. It's not that we think IDEC is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in IDEC and want to know more, you'll find it very useful to know what risks this stock faces. Be aware that IDEC is showing 2 warning signs in our investment analysis, and 1 of those is significant...

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.