There's A Lot To Like About H2O Retailing's (TSE:8242) Upcoming JP¥20.00 Dividend

It looks like H2O Retailing Corporation (TSE:8242) is about to go ex-dividend in the next 3 days. The ex-dividend date is one business day before a company's record date, 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 takes at least two business day to settle. This means that investors who purchase H2O Retailing's shares on or after the 27th of September will not receive the dividend, which will be paid on the 2nd of December.

The company's next dividend payment will be JP¥20.00 per share, on the back of last year when the company paid a total of JP¥25.00 to shareholders. Looking at the last 12 months of distributions, H2O Retailing has a trailing yield of approximately 1.2% on its current stock price of JP¥2170.00. If you buy this business for its dividend, you should have an idea of whether H2O Retailing's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for H2O Retailing

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. H2O Retailing has a low and conservative payout ratio of just 6.3% of its income after tax. 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. Luckily it paid out just 15% of its free cash flow last year.

It's positive to see that H2O Retailing's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

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. That's why it's comforting to see H2O Retailing's earnings have been skyrocketing, up 91% per annum for the past five years. H2O Retailing earnings per share have been sprinting ahead like the Road Runner at a track and field day; scarcely stopping even for a cheeky "beep-beep". We also like that it is reinvesting most of its profits in its business.'

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. It looks like the H2O Retailing dividends are largely the same as they were 10 years ago.

To Sum It Up

Should investors buy H2O Retailing for the upcoming dividend? It's great that H2O Retailing is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. Overall we think this is an attractive combination and worthy of further research.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. We've identified 2 warning signs with H2O Retailing (at least 1 which can't be ignored), and understanding them should be part of your investment process.

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.

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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.