We Wouldn't Be Too Quick To Buy Nihon House Holdings Co., Ltd. (TSE:1873) Before It Goes Ex-Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Nihon House Holdings Co., Ltd. (TSE:1873) is about to go ex-dividend in just day or so. 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase Nihon House Holdings' shares before the 30th of October in order to receive the dividend, which the company will pay on the 13th of January.

The company's next dividend payment will be JP¥5.00 per share. Last year, in total, the company distributed JP¥11.00 to shareholders. Looking at the last 12 months of distributions, Nihon House Holdings has a trailing yield of approximately 3.6% on its current stock price of JP¥307.00. If you buy this business for its dividend, you should have an idea of whether Nihon House Holdings's dividend is reliable and sustainable. So we need to investigate whether Nihon House Holdings can afford its dividend, and if the dividend could grow.

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Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Nihon House Holdings paid out 125% 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. A useful secondary check can be to evaluate whether Nihon House Holdings generated enough free cash flow to afford its dividend. It paid out 14% of its free cash flow as dividends last year, which is conservatively low.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Nihon House Holdings fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

See our latest analysis for Nihon House Holdings

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. 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 discomforted by Nihon House Holdings's 27% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Nihon House Holdings has seen its dividend decline 4.8% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

To Sum It Up

Has Nihon House Holdings got what it takes to maintain its dividend payments? It's not a great combination to see a company with earnings in decline and paying out 125% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Nihon House Holdings's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that in mind though, if the poor dividend characteristics of Nihon House Holdings don't faze you, it's worth being mindful of the risks involved with this business. To help with this, we've discovered 5 warning signs for Nihon House Holdings (1 doesn't sit too well with us!) that you ought to be aware of before buying the 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.