Dividend Investors: Don't Be Too Quick To Buy GMO Research & AI, Inc. (TSE:3695) 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 GMO Research & AI, Inc. (TSE:3695) is about to go ex-dividend in just 3 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. This means that investors who purchase GMO Research & AI's shares on or after the 27th of December will not receive the dividend, which will be paid on the 24th of March.

The company's next dividend payment will be JP¥114.84 per share, and in the last 12 months, the company paid a total of JP¥115 per share. Calculating the last year's worth of payments shows that GMO Research & AI has a trailing yield of 4.2% on the current share price of JP¥2721.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether GMO Research & AI has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for GMO Research & AI

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. GMO Research & AI paid out 127% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. A useful secondary check can be to evaluate whether GMO Research & AI generated enough free cash flow to afford its dividend. Dividends consumed 51% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and GMO Research & AI 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. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit GMO Research & AI paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. 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 not enthused to see that GMO Research & AI's earnings per share have remained effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. GMO Research & AI has delivered 12% dividend growth per year on average over the past 10 years.

The Bottom Line

Is GMO Research & AI worth buying for its dividend? Earnings per share have barely moved in recent times, and the company is paying out an uncomfortably high percentage of its income. Fortunately its cash generation was somewhat stronger. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Although, if you're still interested in GMO Research & AI and want to know more, you'll find it very useful to know what risks this stock faces. In terms of investment risks, we've identified 3 warning signs with GMO Research & AI and understanding them should be part of your investment process.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.