Be Sure To Check Out Digital Holdings, Inc. (TSE:2389) Before It Goes Ex-Dividend

Digital Holdings, Inc. (TSE:2389) stock is about to trade ex-dividend in 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. This means that investors who purchase Digital Holdings' shares on or after the 27th of December will not receive the dividend, which will be paid on the 6th of March.

The company's next dividend payment will be JP¥65.00 per share, on the back of last year when the company paid a total of JP¥45.00 to shareholders. Calculating the last year's worth of payments shows that Digital Holdings has a trailing yield of 3.5% on the current share price of JP¥1289.00. 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.

See our latest analysis for Digital Holdings

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. That's why it's good to see Digital Holdings paying out a modest 48% of its earnings. 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. It distributed 26% of its free cash flow as dividends, a comfortable payout level for most companies.

It's positive to see that Digital Holdings's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Digital Holdings earnings per share are up 2.3% per annum over the last five years. Recent earnings growth has been limited. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Digital Holdings has delivered an average of 18% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

The Bottom Line

From a dividend perspective, should investors buy or avoid Digital Holdings? Earnings per share have been growing moderately, and Digital Holdings is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. It might be nice to see earnings growing faster, but Digital Holdings is being conservative with its dividend payouts and could still perform reasonably over the long run. Digital Holdings looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

So while Digital Holdings looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. For instance, we've identified 2 warning signs for Digital Holdings (1 can't be ignored) 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.