Here's Why We're Wary Of Buying Tanabe Consulting GroupLtd's (TSE:9644) For Its Upcoming Dividend

Tanabe Consulting Group Co.,Ltd. (TSE:9644) is about to trade ex-dividend in the next 3 days. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the 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. Meaning, you will need to purchase Tanabe Consulting GroupLtd's shares before the 28th of March to receive the dividend, which will be paid on the 26th of June.

The company's next dividend payment will be JP¥28.00 per share, on the back of last year when the company paid a total of JP¥46.00 to shareholders. Based on the last year's worth of payments, Tanabe Consulting GroupLtd has a trailing yield of 3.3% on the current stock price of JP¥1415.00. 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 Tanabe Consulting GroupLtd has been able to grow its dividends, or if the dividend might be cut.

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Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. 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. We'd be worried about the risk of a drop in earnings. A useful secondary check can be to evaluate whether Tanabe Consulting GroupLtd generated enough free cash flow to afford its dividend. The company paid out 104% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

Tanabe Consulting GroupLtd 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.

While Tanabe Consulting GroupLtd's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Tanabe Consulting GroupLtd's ability to maintain its dividend.

Check out our latest analysis for Tanabe Consulting GroupLtd

Click here to see how much of its profit Tanabe Consulting GroupLtd 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. This is why it's a relief to see Tanabe Consulting GroupLtd earnings per share are up 6.7% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last five years, Tanabe Consulting GroupLtd has lifted its dividend by approximately 16% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Is Tanabe Consulting GroupLtd an attractive dividend stock, or better left on the shelf? Tanabe Consulting GroupLtd is paying out a reasonable percentage of its income and an uncomfortably high 104% of its cash flow as dividends. At least earnings per share have been growing steadily. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that in mind though, if the poor dividend characteristics of Tanabe Consulting GroupLtd don't faze you, it's worth being mindful of the risks involved with this business. Our analysis shows 1 warning sign for Tanabe Consulting GroupLtd and you should be aware of it before buying any shares.

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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.