Be Sure To Check Out Watts Co., Ltd. (TSE:2735) Before It Goes Ex-Dividend

Readers hoping to buy Watts Co., Ltd. (TSE:2735) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is two business days 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 of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. Accordingly, Watts investors that purchase the stock on or after the 28th of August will not receive the dividend, which will be paid on the 28th of November.

The company's next dividend payment will be JP¥7.50 per share, on the back of last year when the company paid a total of JP¥15.00 to shareholders. Looking at the last 12 months of distributions, Watts has a trailing yield of approximately 2.2% on its current stock price of JP¥686.00. 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.

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Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Fortunately Watts's payout ratio is modest, at just 40% of profit. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out more than half (63%) of its free cash flow in the past year, which is within an average range for most companies.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

See our latest analysis for Watts

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

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Watts has grown its earnings rapidly, up 61% a year for 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. It looks like the Watts dividends are largely the same as they were 10 years ago.

Final Takeaway

Is Watts worth buying for its dividend? Earnings per share have grown at a nice rate in recent times and over the last year, Watts paid out less than half its earnings and a bit over half its free cash flow. There's a lot to like about Watts, and we would prioritise taking a closer look at it.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. Case in point: We've spotted 2 warning signs for Watts you should be aware of.

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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.