We Wouldn't Be Too Quick To Buy Dai Nippon Toryo Company, Limited (TSE:4611) Before It Goes Ex-Dividend

Dai Nippon Toryo Company, Limited (TSE:4611) is about to trade ex-dividend in the next two 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 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 Dai Nippon Toryo Company's shares before the 28th of March to receive the dividend, which will be paid on the 1st of July.

The company's next dividend payment will be JP¥30.00 per share. Last year, in total, the company distributed JP¥30.00 to shareholders. Based on the last year's worth of payments, Dai Nippon Toryo Company has a trailing yield of 2.5% on the current stock price of JP¥1186.00. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Dai Nippon Toryo Company

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Dai Nippon Toryo Company has a low and conservative payout ratio of just 18% of its income after tax. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the past year it paid out 183% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

While Dai Nippon Toryo Company'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 Dai Nippon Toryo Company's ability to maintain its dividend.

Click here to see how much of its profit Dai Nippon Toryo Company 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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's not ideal to see Dai Nippon Toryo Company's earnings per share have been shrinking at 2.3% a year over the previous five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Dai Nippon Toryo Company has delivered an average of 12% per year annual increase in its dividend, based on the past 10 years of dividend payments.

Final Takeaway

Has Dai Nippon Toryo Company got what it takes to maintain its dividend payments? It's disappointing to see earnings per share declining, and this would ordinarily be enough to discourage us from most dividend stocks, even though Dai Nippon Toryo Company is paying out less than half its income as dividends. However, it's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Dai Nippon Toryo Company.

With that being said, if you're still considering Dai Nippon Toryo Company as an investment, you'll find it beneficial to know what risks this stock is facing. Be aware that Dai Nippon Toryo Company is showing 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

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.