Don't Buy JMS Co.,Ltd. (TSE:7702) For Its Next Dividend Without Doing These Checks

Readers hoping to buy JMS Co.,Ltd. (TSE:7702) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order 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 JMSLtd's shares on or after the 27th of September, you won't be eligible to receive the dividend, when it is paid on the 9th of December.

The company's next dividend payment will be JP¥8.50 per share, on the back of last year when the company paid a total of JP¥17.00 to shareholders. Based on the last year's worth of payments, JMSLtd stock has a trailing yield of around 3.4% on the current share price of JP¥507.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for JMSLtd

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. Last year, JMSLtd paid out 315% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. 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. It paid out 83% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and JMSLtd fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit JMSLtd 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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. JMSLtd's earnings per share have plummeted approximately 35% 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. JMSLtd has delivered an average of 0.6% per year annual increase in its dividend, based on the past 10 years of dividend payments.

The Bottom Line

Has JMSLtd got what it takes to maintain its dividend payments? Earnings per share have been in decline, which is not encouraging. Additionally, JMSLtd is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that in mind though, if the poor dividend characteristics of JMSLtd don't faze you, it's worth being mindful of the risks involved with this business. For example, JMSLtd has 3 warning signs (and 1 which doesn't sit too well with us) we think 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.