Should Income Investors Look At Prime Strategy Co., Ltd. (TSE:5250) Before Its Ex-Dividend?

Prime Strategy Co., Ltd. (TSE:5250) is about to trade ex-dividend in the next 3 days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled 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. In other words, investors can purchase Prime Strategy's shares before the 27th of November in order to be eligible for the dividend, which will be paid on the 2nd of March.

The company's next dividend payment will be JP¥21.00 per share, and in the last 12 months, the company paid a total of JP¥21.00 per share. Looking at the last 12 months of distributions, Prime Strategy has a trailing yield of approximately 2.4% on its current stock price of JP¥890.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. 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. Prime Strategy is paying out an acceptable 66% of its profit, a common payout level among most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year it paid out 52% of its free cash flow as dividends, within the usual 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.

Check out our latest analysis for Prime Strategy

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's encouraging to see Prime Strategy has grown its earnings rapidly, up 27% a year for the past five years. Management appears to be striking a nice balance between reinvesting for growth and paying dividends to shareholders. With a reasonable payout ratio, profits being reinvested, and some earnings growth, Prime Strategy could have strong prospects for future increases to the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last two years, Prime Strategy has lifted its dividend by approximately 2.5% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Prime Strategy is keeping back more of its profits to grow the business.

Final Takeaway

Has Prime Strategy got what it takes to maintain its dividend payments? It's good to see earnings are growing, since all of the best dividend stocks grow their earnings meaningfully over the long run. That's why we're glad to see Prime Strategy's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 66% and 52% respectively. Overall, it's hard to get excited about Prime Strategy from a dividend perspective.

While it's tempting to invest in Prime Strategy for the dividends alone, you should always be mindful of the risks involved. Case in point: We've spotted 1 warning sign for Prime Strategy 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.