It Might Not Be A Great Idea To Buy EIZO Corporation (TSE:6737) For Its Next Dividend

EIZO Corporation (TSE:6737) stock is about to trade ex-dividend in three days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a 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. Meaning, you will need to purchase EIZO's shares before the 27th of September to receive the dividend, which will be paid on the 2nd of December.

The company's next dividend payment will be JP¥105.00 per share. Last year, in total, the company distributed JP¥210 to shareholders. Based on the last year's worth of payments, EIZO stock has a trailing yield of around 4.8% on the current share price of JP¥4420.00. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for EIZO

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. Last year EIZO paid out 92% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether EIZO generated enough free cash flow to afford its dividend. Dividends consumed 68% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's good to see that while EIZO's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

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

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're not enthused to see that EIZO's earnings per share have remained effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. EIZO has delivered 15% dividend growth per year on average over the past 10 years.

The Bottom Line

Should investors buy EIZO for the upcoming dividend? Flat earnings per share and a high payout ratio are not what we like to see, although at least it paid out a lower percentage of its free cash flow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that in mind though, if the poor dividend characteristics of EIZO don't faze you, it's worth being mindful of the risks involved with this business. Case in point: We've spotted 2 warning signs for EIZO you should be aware of.

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.