Why It Might Not Make Sense To Buy KG Intelligence CO., LTD. (TSE:2408) For Its Upcoming Dividend

Readers hoping to buy KG Intelligence CO., LTD. (TSE:2408) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. Meaning, you will need to purchase KG Intelligence's shares before the 18th of December to receive the dividend, which will be paid on the 25th of February.

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¥36.00 to shareholders. Last year's total dividend payments show that KG Intelligence has a trailing yield of 5.1% on the current share price of JP¥710.00. If you buy this business for its dividend, you should have an idea of whether KG Intelligence's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

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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. KG Intelligence distributed an unsustainably high 155% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. KG Intelligence paid out more free cash flow than it generated - 170%, 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.

KG Intelligence 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.

As KG Intelligence's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

See our latest analysis for KG Intelligence

Click here to see how much of its profit KG Intelligence 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. It's encouraging to see KG Intelligence has grown its earnings rapidly, up 46% a year for the past five years. Earnings per share are increasing at a rapid rate, but the company is paying out more than we think is sustainable, based on current earnings. Companies that pay out more than they earned while growing rapidly, can find themselves short of cash in a few years when growth slows.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. KG Intelligence has delivered 11% dividend growth per year on average over the past 10 years. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

Final Takeaway

From a dividend perspective, should investors buy or avoid KG Intelligence? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with KG Intelligence. Our analysis shows 3 warning signs for KG Intelligence that we strongly recommend you have a look at before investing in the company.

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.