Do These 3 Checks Before Buying Scala, Inc. (TSE:4845) For Its Upcoming Dividend

It looks like Scala, Inc. (TSE:4845) is about to go ex-dividend in the next 2 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. 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. Therefore, if you purchase Scala's shares on or after the 27th of June, you won't be eligible to receive the dividend, when it is paid on the 26th of September.

The company's next dividend payment will be JP¥18.75 per share. Last year, in total, the company distributed JP¥37.50 to shareholders. Last year's total dividend payments show that Scala has a trailing yield of 5.3% on the current share price of JP¥707.00. If you buy this business for its dividend, you should have an idea of whether Scala'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 Scala

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. Scala lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If Scala didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Over the past year it paid out 165% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Click here to see how much of its profit Scala 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 fall far enough, the company could be forced to cut its dividend. Scala was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Scala has lifted its dividend by approximately 17% a year on average.

Get our latest analysis on Scala's balance sheet health here.

To Sum It Up

Is Scala an attractive dividend stock, or better left on the shelf? It's hard to get used to Scala paying a dividend despite reporting a loss over the past year. Worse, the dividend was not well covered by cash flow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

So if you're still interested in Scala despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. We've identified 3 warning signs with Scala (at least 2 which make us uncomfortable), and understanding these should be part of your investment process.

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.

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