Don't Race Out To Buy Wavelock Holdings Co., Ltd. (TSE:7940) Just Because It's Going Ex-Dividend

Readers hoping to buy Wavelock Holdings Co., Ltd. (TSE:7940) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date generally occurs two days 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase Wavelock Holdings' shares before the 28th of March in order to receive the dividend, which the company will pay on the 23rd of June.

The company's next dividend payment will be JP¥15.00 per share, on the back of last year when the company paid a total of JP¥30.00 to shareholders. Looking at the last 12 months of distributions, Wavelock Holdings has a trailing yield of approximately 4.9% on its current stock price of JP¥609.00. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Wavelock Holdings has been able to grow its dividends, or if the dividend might be cut.

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Wavelock Holdings distributed an unsustainably high 135% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Thankfully its dividend payments took up just 33% of the free cash flow it generated, which is a comfortable payout ratio.

It's good to see that while Wavelock Holdings's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

View our latest analysis for Wavelock Holdings

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Wavelock Holdings's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 31% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Wavelock Holdings has delivered 2.8% dividend growth per year on average over the past eight years. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Wavelock Holdings is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

Has Wavelock Holdings got what it takes to maintain its dividend payments? It's not a great combination to see a company with earnings in decline and paying out 135% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Wavelock Holdings's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. 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 Wavelock Holdings don't faze you, it's worth being mindful of the risks involved with this business. For instance, we've identified 4 warning signs for Wavelock Holdings (1 is a bit unpleasant) you should be aware of.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.