Here's Why We're Wary Of Buying Mainichi Comnet's (TSE:8908) For Its Upcoming Dividend

Mainichi Comnet Co., Ltd. (TSE:8908) is about to trade ex-dividend in the next four 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 as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. This means that investors who purchase Mainichi Comnet's shares on or after the 28th of November will not receive the dividend, which will be paid on the 6th of February.

The company's next dividend payment will be JP¥9.00 per share, on the back of last year when the company paid a total of JP¥31.00 to shareholders. Calculating the last year's worth of payments shows that Mainichi Comnet has a trailing yield of 4.3% on the current share price of JP¥725.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Mainichi Comnet

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Mainichi Comnet paid out 53% of its earnings to investors last year, a normal payout level for most businesses. 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. Dividends consumed 60% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's positive to see that Mainichi Comnet's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see how much of its profit Mainichi Comnet 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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's not ideal to see Mainichi Comnet's earnings per share have been shrinking at 3.9% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Mainichi Comnet has lifted its dividend by approximately 13% a year on average. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

To Sum It Up

Has Mainichi Comnet got what it takes to maintain its dividend payments? It's never good to see earnings per share shrinking, but at least the dividend payout ratios appear reasonable. We're aware though that if earnings continue to decline, the dividend could be at risk. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Mainichi Comnet.

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 Mainichi Comnet. Every company has risks, and we've spotted 2 warning signs for Mainichi Comnet (of which 1 is significant!) you should know about.

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.