Why It Might Not Make Sense To Buy Shinko Shoji Co., Ltd. (TSE:8141) 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 Shinko Shoji Co., Ltd. (TSE:8141) 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase Shinko Shoji's shares before the 28th of March in order to be eligible for the dividend, which will be paid on the 17th of June.

The company's next dividend payment will be JP¥8.00 per share, and in the last 12 months, the company paid a total of JP¥15.50 per share. Based on the last year's worth of payments, Shinko Shoji has a trailing yield of 1.7% on the current stock price of JP¥910.00. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

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. Last year, Shinko Shoji paid out 95% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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 11% of its free cash flow as dividends last year, which is conservatively low.

It's good to see that while Shinko Shoji'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.

View our latest analysis for Shinko Shoji

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

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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That explains why we're not overly excited about Shinko Shoji's flat earnings over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Shinko Shoji's dividend payments are effectively flat on where they were 10 years ago.

To Sum It Up

Has Shinko Shoji got what it takes to maintain its dividend payments? Along with flat earnings per share, Shinko Shoji paid out an uncomfortably high percentage of its earnings. It paid out a lower percentage of its free cash flow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Shinko Shoji.

With that being said, if you're still considering Shinko Shoji as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 1 warning sign for Shinko Shoji and you should be aware of it 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.