Should Income Investors Look At Kokusai Electric Corporation (TSE:6525) Before Its Ex-Dividend?

Kokusai Electric Corporation (TSE:6525) is about to trade ex-dividend in the next 3 days. 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Meaning, you will need to purchase Kokusai Electric's shares before the 28th of March to receive the dividend, which will be paid on the 30th of June.

The company's next dividend payment will be JP¥18.00 per share. Last year, in total, the company distributed JP¥36.00 to shareholders. Looking at the last 12 months of distributions, Kokusai Electric has a trailing yield of approximately 1.3% on its current stock price of JP¥2803.00. If you buy this business for its dividend, you should have an idea of whether Kokusai Electric's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are 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. Kokusai Electric paid out just 21% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. 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. Over the past year it paid out 127% of its free cash flow as dividends, which is uncomfortably 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.

Kokusai Electric paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Kokusai Electric's ability to maintain its dividend.

View our latest analysis for Kokusai Electric

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Kokusai Electric's earnings per share have dropped 9.3% a year over the past three years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Given that Kokusai Electric has only been paying a dividend for a year, there's not much of a past history to draw insight from.

Final Takeaway

Should investors buy Kokusai Electric for the upcoming dividend? Kokusai Electric'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 that we think Kokusai Electric is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that in mind though, if the poor dividend characteristics of Kokusai Electric don't faze you, it's worth being mindful of the risks involved with this business. Case in point: We've spotted 1 warning sign for Kokusai Electric 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.