Do These 3 Checks Before Buying Eisai Co., Ltd. (TSE:4523) For Its Upcoming Dividend

It looks like Eisai Co., Ltd. (TSE:4523) 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. 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. Therefore, if you purchase Eisai's shares on or after the 27th of September, you won't be eligible to receive the dividend, when it is paid on the 18th of November.

The company's next dividend payment will be JP¥80.00 per share, on the back of last year when the company paid a total of JP¥160 to shareholders. Calculating the last year's worth of payments shows that Eisai has a trailing yield of 2.8% on the current share price of JP¥5753.00. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Eisai

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. Eisai distributed an unsustainably high 141% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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. It paid out an unsustainably high 330% of its free cash flow as dividends over the past 12 months, which is worrying. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.

Cash is slightly more important than profit from a dividend perspective, but given Eisai's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

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. 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 Eisai's 12% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, Eisai has lifted its dividend by approximately 0.6% a year on average.

The Bottom Line

Has Eisai got what it takes to maintain its dividend payments? Not only are earnings per share declining, but Eisai is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. Bottom line: Eisai has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

So if you're still interested in Eisai despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Our analysis shows 3 warning signs for Eisai 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.