Dividend Investors: Don't Be Too Quick To Buy Takeda Pharmaceutical Company Limited (TSE:4502) For Its Upcoming Dividend

It looks like Takeda Pharmaceutical Company Limited (TSE:4502) is about to go ex-dividend in the next three 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Therefore, if you purchase Takeda Pharmaceutical's shares on or after the 27th of September, you won't be eligible to receive the dividend, when it is paid on the 2nd of December.

The company's next dividend payment will be JP¥98.00 per share, and in the last 12 months, the company paid a total of JP¥196 per share. Based on the last year's worth of payments, Takeda Pharmaceutical stock has a trailing yield of around 4.6% on the current share price of JP¥4275.00. If you buy this business for its dividend, you should have an idea of whether Takeda Pharmaceutical's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Takeda Pharmaceutical

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Takeda Pharmaceutical distributed an unsustainably high 197% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether Takeda Pharmaceutical generated enough free cash flow to afford its dividend. Over the last year it paid out 66% of its free cash flow as dividends, within the usual range for most companies.

It's good to see that while Takeda Pharmaceutical's dividends were not covered by profits, at least they are affordable from a cash perspective. 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.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Takeda Pharmaceutical's earnings per share have dropped 7.6% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Takeda Pharmaceutical has lifted its dividend by approximately 0.9% a year on average.

The Bottom Line

Is Takeda Pharmaceutical an attractive dividend stock, or better left on the shelf? Earnings per share have been shrinking in recent times. Worse, Takeda Pharmaceutical's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Takeda Pharmaceutical.

With that in mind though, if the poor dividend characteristics of Takeda Pharmaceutical don't faze you, it's worth being mindful of the risks involved with this business. For example, we've found 4 warning signs for Takeda Pharmaceutical (1 is a bit concerning!) that deserve your attention before investing in the shares.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.