Read This Before Considering Nakayama Steel Works, Ltd. (TSE:5408) For Its Upcoming JP¥18.00 Dividend

Readers hoping to buy Nakayama Steel Works, Ltd. (TSE:5408) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is usually set to be one business day 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 because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. This means that investors who purchase Nakayama Steel Works' shares on or after the 27th of September will not receive the dividend, which will be paid on the 2nd of December.

The company's next dividend payment will be JP¥18.00 per share, on the back of last year when the company paid a total of JP¥40.00 to shareholders. Calculating the last year's worth of payments shows that Nakayama Steel Works has a trailing yield of 5.1% on the current share price of JP¥788.00. If you buy this business for its dividend, you should have an idea of whether Nakayama Steel Works's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Nakayama Steel Works

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Nakayama Steel Works paid out a comfortable 35% of its profit last year. 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. Nakayama Steel Works paid out more free cash flow than it generated - 165%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Nakayama Steel Works 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.

Nakayama Steel Works paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Nakayama Steel Works's ability to maintain its dividend.

Click here to see how much of its profit Nakayama Steel Works 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, Nakayama Steel Works's earnings per share have been growing at 17% a year for the past five years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

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, eight years ago, Nakayama Steel Works has lifted its dividend by approximately 30% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

The Bottom Line

Has Nakayama Steel Works got what it takes to maintain its dividend payments? We're glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it's not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we're not all that optimistic on its dividend prospects.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. To help with this, we've discovered 1 warning sign for Nakayama Steel Works that you should be aware of before investing in their 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.