It Might Not Be A Great Idea To Buy Wesco Holdings Inc. (TSE:6091) For Its Next Dividend

It looks like Wesco Holdings Inc. (TSE:6091) is about to go ex-dividend in the next 4 days. The ex-dividend date is commonly two business days 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 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 Wesco Holdings' shares before the 30th of July in order to be eligible for the dividend, which will be paid on the 30th of October.

The company's upcoming dividend is JP¥22.00 a share, following on from the last 12 months, when the company distributed a total of JP¥22.00 per share to shareholders. Last year's total dividend payments show that Wesco Holdings has a trailing yield of 3.0% on the current share price of JP¥733.00. If you buy this business for its dividend, you should have an idea of whether Wesco Holdings's dividend is reliable and sustainable. So we need to investigate whether Wesco Holdings can afford its dividend, and if the dividend could grow.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

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. Wesco Holdings paid out a comfortable 37% of its profit last year. 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. Wesco Holdings paid out more free cash flow than it generated - 152%, 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.

Wesco Holdings does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

Wesco Holdings 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 Wesco Holdings's ability to maintain its dividend.

See our latest analysis for Wesco Holdings

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

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's not encouraging to see that Wesco Holdings's earnings are effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Wesco Holdings has delivered an average of 12% per year annual increase in its dividend, based on the past 10 years of dividend payments.

Final Takeaway

Has Wesco Holdings got what it takes to maintain its dividend payments? It's disappointing to see earnings per share have fallen slightly, even though Wesco Holdings is paying out less than half its income as dividends. It's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. Bottom line: Wesco Holdings has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

So if you're still interested in Wesco Holdings despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. To help with this, we've discovered 2 warning signs for Wesco Holdings that you should be aware of before investing in their shares.

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.

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.