Here's Why We're Wary Of Buying Direct Marketing MiX's (TSE:7354) 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 Direct Marketing MiX Inc. (TSE:7354) is about to go ex-dividend in just three days. Typically, the ex-dividend date is one business day 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase Direct Marketing MiX's shares before the 27th of December in order to be eligible for the dividend, which will be paid on the 5th of March.

The company's next dividend payment will be JP¥3.00 per share, and in the last 12 months, the company paid a total of JP¥3.00 per share. Calculating the last year's worth of payments shows that Direct Marketing MiX has a trailing yield of 1.1% on the current share price of JP¥278.00. If you buy this business for its dividend, you should have an idea of whether Direct Marketing MiX's dividend is reliable and sustainable. As a result, readers should always check whether Direct Marketing MiX has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Direct Marketing MiX

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. Direct Marketing MiX reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. It paid out 107% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

Click here to see how much of its profit Direct Marketing MiX paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Direct Marketing MiX was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Direct Marketing MiX has seen its dividend decline 12% per annum on average over the past four years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

We update our analysis on Direct Marketing MiX every 24 hours, so you can always get the latest insights on its financial health, here.

The Bottom Line

Should investors buy Direct Marketing MiX for the upcoming dividend? It's hard to get used to Direct Marketing MiX paying a dividend despite reporting a loss over the past year. Worse, the dividend was not well covered by cash flow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Direct Marketing MiX.

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 Direct Marketing MiX. Be aware that Direct Marketing MiX is showing 3 warning signs in our investment analysis, and 1 of those is a bit concerning...

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.