Tomoku Co., Ltd. (TSE:3946) Passed Our Checks, And It's About To Pay A JP¥45.00 Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Tomoku Co., Ltd. (TSE:3946) is about to trade ex-dividend in the next three days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. Accordingly, Tomoku investors that purchase the stock on or after the 27th of September will not receive the dividend, which will be paid on the 4th of December.

The company's upcoming dividend is JP¥45.00 a share, following on from the last 12 months, when the company distributed a total of JP¥90.00 per share to shareholders. Based on the last year's worth of payments, Tomoku has a trailing yield of 3.7% on the current stock price of JP¥2403.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Tomoku can afford its dividend, and if the dividend could grow.

View our latest analysis for Tomoku

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Tomoku has a low and conservative payout ratio of just 21% 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. Thankfully its dividend payments took up just 27% of the free cash flow it generated, which is a comfortable payout ratio.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

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. This is why it's a relief to see Tomoku earnings per share are up 3.7% per annum over the last five years. Recent growth has not been impressive. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Tomoku has lifted its dividend by approximately 12% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Should investors buy Tomoku for the upcoming dividend? Earnings per share have been growing moderately, and Tomoku is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Tomoku is halfway there. Overall we think this is an attractive combination and worthy of further research.

In light of that, while Tomoku has an appealing dividend, it's worth knowing the risks involved with this stock. Our analysis shows 2 warning signs for Tomoku that we strongly recommend you have a look at before investing in the company.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.