Dividend Investors: Don't Be Too Quick To Buy Asahi Kagaku Kogyo Co.,Ltd. (TSE:7928) For Its Upcoming Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Asahi Kagaku Kogyo Co.,Ltd. (TSE:7928) is about to go ex-dividend in just 3 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 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 Asahi Kagaku KogyoLtd's shares before the 27th of February to receive the dividend, which will be paid on the 20th of May.

The company's next dividend payment will be JP¥5.00 per share, and in the last 12 months, the company paid a total of JP¥12.00 per share. Last year's total dividend payments show that Asahi Kagaku KogyoLtd has a trailing yield of 2.0% on the current share price of JP¥598.00. If you buy this business for its dividend, you should have an idea of whether Asahi Kagaku KogyoLtd's dividend is reliable and sustainable. So we need to investigate whether Asahi Kagaku KogyoLtd can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Asahi Kagaku KogyoLtd

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. Asahi Kagaku KogyoLtd is paying out an acceptable 50% of its profit, a common payout level among most companies. 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 179% 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.

Asahi Kagaku KogyoLtd 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.

Asahi Kagaku KogyoLtd 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 Asahi Kagaku KogyoLtd's ability to maintain its dividend.

Click here to see how much of its profit Asahi Kagaku KogyoLtd 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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at Asahi Kagaku KogyoLtd, with earnings per share up 7.8% on average over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Asahi Kagaku KogyoLtd has increased its dividend at approximately 5.5% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

From a dividend perspective, should investors buy or avoid Asahi Kagaku KogyoLtd? Asahi Kagaku KogyoLtd is paying out a reasonable percentage of its income and an uncomfortably high 179% of its cash flow as dividends. At least earnings per share have been growing steadily. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that in mind though, if the poor dividend characteristics of Asahi Kagaku KogyoLtd don't faze you, it's worth being mindful of the risks involved with this business. To help with this, we've discovered 2 warning signs for Asahi Kagaku KogyoLtd 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.