Should You Buy Hodogaya Chemical Co., Ltd. (TSE:4112) For Its Upcoming Dividend?

Hodogaya Chemical Co., Ltd. (TSE:4112) stock is about to trade ex-dividend in couple of 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Accordingly, Hodogaya Chemical investors that purchase the stock on or after the 27th of September will not receive the dividend, which will be paid on the 16th of December.

The company's upcoming dividend is JP¥42.50 a share, following on from the last 12 months, when the company distributed a total of JP¥85.00 per share to shareholders. Last year's total dividend payments show that Hodogaya Chemical has a trailing yield of 1.8% on the current share price of JP¥4735.00. 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.

View our latest analysis for Hodogaya Chemical

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Hodogaya Chemical has a low and conservative payout ratio of just 16% of its income after tax. A useful secondary check can be to evaluate whether Hodogaya Chemical generated enough free cash flow to afford its dividend. It distributed 27% of its free cash flow as dividends, a comfortable payout level for most companies.

It's positive to see that Hodogaya Chemical's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Fortunately for readers, Hodogaya Chemical's earnings per share have been growing at 15% a year for the past five years. Earnings per share are growing rapidly and the company is keeping more than half of its earnings within the business; an attractive combination which could suggest the company is focused on reinvesting to grow earnings further. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Hodogaya Chemical has lifted its dividend by approximately 7.8% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

To Sum It Up

Is Hodogaya Chemical an attractive dividend stock, or better left on the shelf? We love that Hodogaya Chemical is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. Hodogaya Chemical looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

While it's tempting to invest in Hodogaya Chemical for the dividends alone, you should always be mindful of the risks involved. Every company has risks, and we've spotted 1 warning sign for Hodogaya Chemical you should know about.

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.