Don't Race Out To Buy Tokyo Ohka Kogyo Co., Ltd. (TSE:4186) Just Because It's Going Ex-Dividend

It looks like Tokyo Ohka Kogyo Co., Ltd. (TSE:4186) is about to go ex-dividend in the next 3 days. 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. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Thus, you can purchase Tokyo Ohka Kogyo's shares before the 27th of June in order to receive the dividend, which the company will pay on the 6th of September.

The company's next dividend payment will be JP¥29.00 per share. Last year, in total, the company distributed JP¥58.00 to shareholders. Calculating the last year's worth of payments shows that Tokyo Ohka Kogyo has a trailing yield of 1.3% on the current share price of JP¥4444.00. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Tokyo Ohka Kogyo

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. Tokyo Ohka Kogyo distributed an unsustainably high 144% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out an unsustainably high 334% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how Tokyo Ohka Kogyo intends to continue funding this dividend, or if it could be forced to cut the payment.

Tokyo Ohka Kogyo 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.

Cash is slightly more important than profit from a dividend perspective, but given Tokyo Ohka Kogyo's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

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 fall far enough, the company could be forced to cut its dividend. Fortunately for readers, Tokyo Ohka Kogyo's earnings per share have been growing at 16% a year for the past five years. Earnings are growing pretty quickly, which is great, but it's uncomfortably to see the company paying out 144% of earnings. We're wary of fast-growing companies flaming out by over-committing themselves financially, and consider this a yellow flag.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Tokyo Ohka Kogyo has lifted its dividend by approximately 14% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

Final Takeaway

Is Tokyo Ohka Kogyo an attractive dividend stock, or better left on the shelf? While it's nice to see earnings per share growing, we're curious about how Tokyo Ohka Kogyo intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. Bottom line: Tokyo Ohka Kogyo has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of Tokyo Ohka Kogyo don't faze you, it's worth being mindful of the risks involved with this business. Our analysis shows 1 warning sign for Tokyo Ohka Kogyo and you should be aware of this before buying any shares.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com