Why It Might Not Make Sense To Buy S Foods Inc. (TSE:2292) For Its Upcoming Dividend

S Foods Inc. (TSE:2292) stock is about to trade ex-dividend in 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. Meaning, you will need to purchase S Foods' shares before the 27th of February to receive the dividend, which will be paid on the 27th of May.

The company's next dividend payment will be JP¥45.00 per share, on the back of last year when the company paid a total of JP¥90.00 to shareholders. Based on the last year's worth of payments, S Foods stock has a trailing yield of around 3.8% on the current share price of JP¥2382.00. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether S Foods has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for S Foods

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. S Foods paid out 63% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether S Foods generated enough free cash flow to afford its dividend. Over the last year, it paid out dividends equivalent to 299% 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 S Foods intends to continue funding this dividend, or if it could be forced to cut the payment.

While S Foods'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 S Foods's ability to maintain its dividend.

Click here to see how much of its profit S Foods paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see S Foods's earnings per share have dropped 22% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, S Foods has lifted its dividend by approximately 12% a year on average. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

Final Takeaway

Has S Foods got what it takes to maintain its dividend payments? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of S Foods.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with S Foods. Our analysis shows 2 warning signs for S Foods and you should be aware of them before buying any shares.

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.