We Wouldn't Be Too Quick To Buy Daiwabo Holdings Co., Ltd. (TSE:3107) Before It Goes Ex-Dividend

Daiwabo Holdings Co., Ltd. (TSE:3107) stock is about to trade ex-dividend in three 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 because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase Daiwabo Holdings' shares on or after the 27th of September, you won't be eligible to receive the dividend, when it is paid on the 2nd of December.

The company's next dividend payment will be JP¥35.00 per share, on the back of last year when the company paid a total of JP¥70.00 to shareholders. Last year's total dividend payments show that Daiwabo Holdings has a trailing yield of 2.6% on the current share price of JP¥2682.50. 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.

View our latest analysis for Daiwabo Holdings

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Daiwabo Holdings distributed an unsustainably high 152% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether Daiwabo Holdings generated enough free cash flow to afford its dividend. Fortunately, it paid out only 27% of its free cash flow in the past year.

It's good to see that while Daiwabo Holdings's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Daiwabo Holdings's earnings per share have fallen at approximately 25% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Daiwabo Holdings has increased its dividend at approximately 21% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Daiwabo Holdings is already paying out 152% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Has Daiwabo Holdings got what it takes to maintain its dividend payments? It's never great to see earnings per share declining, especially when a company is paying out 152% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Daiwabo Holdings's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Bottom line: Daiwabo Holdings has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering Daiwabo Holdings as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 3 warning signs for Daiwabo Holdings and you should be aware of them before buying any shares.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.