Should You Buy Fumakilla Limited (TSE:4998) For Its Upcoming Dividend?

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Fumakilla Limited (TSE:4998) is about to trade ex-dividend in the next 4 days. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. This means that investors who purchase Fumakilla's shares on or after the 28th of March will not receive the dividend, which will be paid on the 28th of June.

The company's next dividend payment will be JP¥22.00 per share, and in the last 12 months, the company paid a total of JP¥22.00 per share. Based on the last year's worth of payments, Fumakilla has a trailing yield of 1.9% on the current stock price of JP¥1139.00. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Fumakilla can afford its dividend, and if the dividend could grow.

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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. Fumakilla has a low and conservative payout ratio of just 23% of its income after tax. 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. Fortunately, it paid out only 37% of its free cash flow in the past year.

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.

Check out our latest analysis for Fumakilla

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

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. 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, Fumakilla's earnings per share have been growing at 17% a year for the past five years. The company has managed to grow earnings at a rapid rate, while reinvesting most of the profits within the business. This will make it easier to fund future growth efforts and we think this is an attractive combination - plus the dividend can always be increased later.

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, Fumakilla has lifted its dividend by approximately 4.6% a year on average. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.

To Sum It Up

Has Fumakilla got what it takes to maintain its dividend payments? Fumakilla has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past 10 years, but the conservative payout ratio makes the current dividend look sustainable. It's a promising combination that should mark this company worthy of closer attention.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. For example - Fumakilla has 1 warning sign we think you should be aware of.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.