Chiyoda Co., Ltd. (TSE:8185) Passed Our Checks, And It's About To Pay A JP¥17.00 Dividend

It looks like Chiyoda Co., Ltd. (TSE:8185) is about to go ex-dividend in the next 3 days. Typically, the ex-dividend date is one business day 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 takes at least two business day to settle. Meaning, you will need to purchase Chiyoda's shares before the 27th of February to receive the dividend, which will be paid on the 24th of May.

The company's next dividend payment will be JP¥17.00 per share, on the back of last year when the company paid a total of JP¥34.00 to shareholders. Calculating the last year's worth of payments shows that Chiyoda has a trailing yield of 3.1% on the current share price of JP¥1104.00. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Chiyoda

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Chiyoda is paying out just 23% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. A useful secondary check can be to evaluate whether Chiyoda generated enough free cash flow to afford its dividend. The good news is it paid out just 19% of its free cash flow in the last year.

It's positive to see that Chiyoda'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 the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Chiyoda, with earnings per share up 6.1% on average over the last five years. Earnings per share have been increasing steadily and management is reinvesting almost all of the profits back into the business. This is an attractive combination, because when profits are reinvested effectively, growth can compound, with corresponding benefits for earnings and dividends in the future.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Chiyoda's dividend payments per share have declined at 7.0% per year on average over the past 10 years, which is uninspiring. Chiyoda is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

Final Takeaway

Has Chiyoda got what it takes to maintain its dividend payments? Earnings per share have been growing moderately, and Chiyoda is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Chiyoda is halfway there. Chiyoda looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

In light of that, while Chiyoda has an appealing dividend, it's worth knowing the risks involved with this stock. Our analysis shows 2 warning signs for Chiyoda and you should be aware of them before buying any 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.