Why It Might Not Make Sense To Buy Hisamitsu Pharmaceutical Co., Inc. (TSE:4530) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Hisamitsu Pharmaceutical Co., Inc. (TSE:4530) is about to trade ex-dividend in the next three days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the 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. Thus, you can purchase Hisamitsu Pharmaceutical's shares before the 29th of August in order to receive the dividend, which the company will pay on the 7th of November.

The company's next dividend payment will be JP¥45.00 per share, on the back of last year when the company paid a total of JP¥86.00 to shareholders. Calculating the last year's worth of payments shows that Hisamitsu Pharmaceutical has a trailing yield of 2.1% on the current share price of JP¥4140.00. If you buy this business for its dividend, you should have an idea of whether Hisamitsu Pharmaceutical'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.

See our latest analysis for Hisamitsu Pharmaceutical

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. That's why it's good to see Hisamitsu Pharmaceutical paying out a modest 44% of its earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Hisamitsu Pharmaceutical paid out more free cash flow than it generated - 128%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Hisamitsu Pharmaceutical does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

Hisamitsu Pharmaceutical paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Hisamitsu Pharmaceutical to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit Hisamitsu Pharmaceutical paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. So we're not too excited that Hisamitsu Pharmaceutical's earnings are down 2.7% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Hisamitsu Pharmaceutical has delivered an average of 2.1% per year annual increase in its dividend, based on the past 10 years of dividend payments.

The Bottom Line

Is Hisamitsu Pharmaceutical an attractive dividend stock, or better left on the shelf? Hisamitsu Pharmaceutical's earnings per share have fallen noticeably and, although it paid out less than half its profit as dividends last year, it paid out a disconcertingly high percentage of its cashflow, which is not a great combination. 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 Hisamitsu Pharmaceutical and want to know more, you'll find it very useful to know what risks this stock faces. For example - Hisamitsu Pharmaceutical has 1 warning sign we think you should be aware of.

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.