Do These 3 Checks Before Buying Meiko Network Japan Co., Ltd. (TSE:4668) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Meiko Network Japan Co., Ltd. (TSE:4668) is about to trade ex-dividend in the next 4 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Therefore, if you purchase Meiko Network Japan's shares on or after the 27th of February, you won't be eligible to receive the dividend, when it is paid on the 8th of May.

The company's next dividend payment will be JP¥13.00 per share, on the back of last year when the company paid a total of JP¥26.00 to shareholders. Based on the last year's worth of payments, Meiko Network Japan stock has a trailing yield of around 3.5% on the current share price of JP¥741.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Meiko Network Japan

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Meiko Network Japan is paying out an acceptable 74% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Meiko Network Japan generated enough free cash flow to afford its dividend. Over the last year, it paid out dividends equivalent to 248% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how Meiko Network Japan intends to continue funding this dividend, or if it could be forced to cut the payment.

Meiko Network Japan 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 Meiko Network Japan'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 Meiko Network Japan's ability to maintain its dividend.

Click here to see how much of its profit Meiko Network Japan paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's not ideal to see Meiko Network Japan's earnings per share have been shrinking at 2.1% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Meiko Network Japan's dividend payments per share have declined at 2.1% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

To Sum It Up

From a dividend perspective, should investors buy or avoid Meiko Network Japan? Meiko Network Japan had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. Bottom line: Meiko Network Japan has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering Meiko Network Japan as an investment, you'll find it beneficial to know what risks this stock is facing. Every company has risks, and we've spotted 1 warning sign for Meiko Network Japan you should know about.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.