Do These 3 Checks Before Buying Hakuhodo DY Holdings Inc (TSE:2433) For Its Upcoming Dividend

Hakuhodo DY Holdings Inc (TSE:2433) stock is about to trade ex-dividend in three days. 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. Accordingly, Hakuhodo DY Holdings investors that purchase the stock on or after the 29th of September will not receive the dividend, which will be paid on the 8th of December.

The company's next dividend payment will be JP¥16.00 per share, on the back of last year when the company paid a total of JP¥32.00 to shareholders. Calculating the last year's worth of payments shows that Hakuhodo DY Holdings has a trailing yield of 2.7% on the current share price of JP¥1183.00. If you buy this business for its dividend, you should have an idea of whether Hakuhodo DY Holdings'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. Hakuhodo DY Holdings distributed an unsustainably high 136% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. The good news is it paid out just 18% of its free cash flow in the last year.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Hakuhodo DY Holdings fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Check out our latest analysis for Hakuhodo DY Holdings

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by Hakuhodo DY Holdings's 28% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Hakuhodo DY Holdings has increased its dividend at approximately 7.9% a year on average. 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. Hakuhodo DY 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.

The Bottom Line

Should investors buy Hakuhodo DY Holdings for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 136% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Hakuhodo DY Holdings's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Hakuhodo DY Holdings.

With that being said, if you're still considering Hakuhodo DY Holdings as an investment, you'll find it beneficial to know what risks this stock is facing. Case in point: We've spotted 3 warning signs for Hakuhodo DY Holdings 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.