Should You Buy Sankyo Co., Ltd. (TSE:6417) For Its Upcoming Dividend?

Readers hoping to buy Sankyo Co., Ltd. (TSE:6417) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. Thus, you can purchase Sankyo's shares before the 29th of September in order to receive the dividend, which the company will pay on the 2nd of December.

The company's next dividend payment will be JP¥45.00 per share. Last year, in total, the company distributed JP¥90.00 to shareholders. Last year's total dividend payments show that Sankyo has a trailing yield of 3.4% on the current share price of JP¥2639.50. If you buy this business for its dividend, you should have an idea of whether Sankyo's dividend is reliable and sustainable. So we need to investigate whether Sankyo can afford its dividend, and if the dividend could grow.

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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. Fortunately Sankyo's payout ratio is modest, at just 37% of profit. A useful secondary check can be to evaluate whether Sankyo generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 37% of the free cash flow it generated, which is a comfortable payout ratio.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Check out our latest analysis for Sankyo

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

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see Sankyo's earnings have been skyrocketing, up 51% per annum for the past five years. Earnings per share have been growing very quickly, and the company is paying out a relatively low percentage of its profit and cash flow. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Sankyo has delivered 12% dividend growth per year on average over the past 10 years. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

To Sum It Up

Should investors buy Sankyo for the upcoming dividend? Sankyo has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past 10 years, but the conservative payout ratio makes the current dividend look sustainable. There's a lot to like about Sankyo, and we would prioritise taking a closer look at it.

While it's tempting to invest in Sankyo for the dividends alone, you should always be mindful of the risks involved. To help with this, we've discovered 2 warning signs for Sankyo (1 is concerning!) that you ought to be aware of before buying the 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.