Read This Before Buying Johnan Academic Preparatory Institute, Inc. (TYO:4720) For Its Dividend

Dividend paying stocks like Johnan Academic Preparatory Institute, Inc. (TYO:4720) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

Investors might not know much about Johnan Academic Preparatory Institute's dividend prospects, even though it has been paying dividends for the last seven years and offers a 1.2% yield. A low yield is generally a turn-off, but if the prospects for earnings growth were strong, investors might be pleasantly surprised by the long-term results. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Click the interactive chart for our full dividend analysis

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. While Johnan Academic Preparatory Institute pays a dividend, it reported a loss over the last year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Last year, Johnan Academic Preparatory Institute paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

While the above analysis focuses on dividends relative to a company's earnings, we do note Johnan Academic Preparatory Institute's strong net cash position, which will let it pay larger dividends for a time, should it choose.

Consider getting our latest analysis on Johnan Academic Preparatory Institute's financial position here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Johnan Academic Preparatory Institute has been paying a dividend for the past seven years. It's good to see that Johnan Academic Preparatory Institute has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past seven-year period, the first annual payment was JP¥8.0 in 2014, compared to JP¥5.0 last year. The dividend has shrunk at around 6.5% a year during that period. Johnan Academic Preparatory Institute's dividend hasn't shrunk linearly at 6.5% per annum, but the CAGR is a useful estimate of the historical rate of change.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Johnan Academic Preparatory Institute's EPS have fallen by approximately 37% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Johnan Academic Preparatory Institute's earnings per share, which support the dividend, have been anything but stable.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. It's a concern to see that the company paid a dividend despite reporting a loss, and the dividend was also not well covered by free cash flow. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. Using these criteria, Johnan Academic Preparatory Institute looks quite suboptimal from a dividend investment perspective.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. To that end, Johnan Academic Preparatory Institute has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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This article by Simply Wall St is general in nature. 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.
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