Dividend Investors: Don't Be Too Quick To Buy EIZO Corporation (TSE:6737) For Its Upcoming Dividend

EIZO Corporation (TSE:6737) stock is about to trade ex-dividend in three days. The ex-dividend date is commonly two business days before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase EIZO's shares before the 28th of March to receive the dividend, which will be paid on the 2nd of June.

The company's next dividend payment will be JP¥52.50 per share. Last year, in total, the company distributed JP¥105 to shareholders. Last year's total dividend payments show that EIZO has a trailing yield of 4.8% on the current share price of JP¥2205.00. 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.

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. EIZO distributed an unsustainably high 114% 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 EIZO generated enough free cash flow to afford its dividend. It distributed 33% of its free cash flow as dividends, a comfortable payout level for most companies.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and EIZO fortunately did generate enough cash to fund its dividend. 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.

View our latest analysis for EIZO

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. So we're not too excited that EIZO's earnings are down 2.3% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. EIZO has delivered 13% dividend growth per year on average over the past 10 years. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. EIZO is already paying out 114% 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

Is EIZO worth buying for its dividend? It's never great to see earnings per share declining, especially when a company is paying out 114% 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 EIZO's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Bottom line: EIZO has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Although, if you're still interested in EIZO and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 2 warning signs for EIZO that we recommend you consider before investing in the business.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.