Don't Buy Heiwa Paper Co.,Ltd. (TSE:9929) For Its Next Dividend Without Doing These Checks

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Heiwa Paper Co.,Ltd. (TSE:9929) is about to trade ex-dividend in the next 3 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. Therefore, if you purchase Heiwa PaperLtd's shares on or after the 27th of September, you won't be eligible to receive the dividend, when it is paid on the 4th of December.

The company's upcoming dividend is JP¥6.00 a share, following on from the last 12 months, when the company distributed a total of JP¥12.00 per share to shareholders. Based on the last year's worth of payments, Heiwa PaperLtd stock has a trailing yield of around 2.7% on the current share price of JP¥446.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Heiwa PaperLtd can afford its dividend, and if the dividend could grow.

See our latest analysis for Heiwa PaperLtd

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Its dividend payout ratio is 83% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. It could become a concern if earnings started to decline. A useful secondary check can be to evaluate whether Heiwa PaperLtd generated enough free cash flow to afford its dividend. Heiwa PaperLtd paid out more free cash flow than it generated - 147%, to be precise - last year, which we think is concerningly 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.

Heiwa PaperLtd paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Heiwa PaperLtd's ability to maintain its dividend.

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Heiwa PaperLtd's earnings per share have fallen at approximately 9.2% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Heiwa PaperLtd has increased its dividend at approximately 1.8% a year on average.

The Bottom Line

Is Heiwa PaperLtd an attractive dividend stock, or better left on the shelf? Heiwa PaperLtd had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Heiwa PaperLtd.

With that being said, if you're still considering Heiwa PaperLtd as an investment, you'll find it beneficial to know what risks this stock is facing. To help with this, we've discovered 2 warning signs for Heiwa PaperLtd that you should be aware of before investing in their 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.