Dividend Investors: Don't Be Too Quick To Buy Kyowa Electronic Instruments Co., Ltd. (TSE:6853) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Kyowa Electronic Instruments Co., Ltd. (TSE:6853) is about to trade ex-dividend in the next three days. The ex-dividend date is one business day 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Thus, you can purchase Kyowa Electronic Instruments' shares before the 27th of December in order to receive the dividend, which the company will pay on the 28th of March.

The company's next dividend payment will be JP¥8.50 per share. Last year, in total, the company distributed JP¥17.00 to shareholders. Calculating the last year's worth of payments shows that Kyowa Electronic Instruments has a trailing yield of 4.0% on the current share price of JP¥425.00. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Kyowa Electronic Instruments

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Kyowa Electronic Instruments paid out a comfortable 46% of its profit last year. 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. It paid out an unsustainably high 236% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since Kyowa Electronic Instruments is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

Kyowa Electronic Instruments does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

While Kyowa Electronic Instruments's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Kyowa Electronic Instruments's ability to maintain its dividend.

Click here to see how much of its profit Kyowa Electronic Instruments paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings fall far enough, the company could be forced to cut its dividend. That explains why we're not overly excited about Kyowa Electronic Instruments's flat earnings 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. Kyowa Electronic Instruments has delivered an average of 7.8% per year annual increase in its dividend, based on the past 10 years of dividend payments.

To Sum It Up

Has Kyowa Electronic Instruments got what it takes to maintain its dividend payments? It's disappointing to see earnings per share have fallen slightly, even though Kyowa Electronic Instruments is paying out less than half its income as dividends. It's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Kyowa Electronic Instruments.

With that in mind though, if the poor dividend characteristics of Kyowa Electronic Instruments don't faze you, it's worth being mindful of the risks involved with this business. For example, we've found 2 warning signs for Kyowa Electronic Instruments that we recommend you consider before investing in the business.

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.