Why It Might Not Make Sense To Buy Keiyo Gas Co., Ltd. (TSE:9539) For Its Upcoming Dividend

Keiyo Gas Co., Ltd. (TSE:9539) 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. 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. Accordingly, Keiyo Gas investors that purchase the stock on or after the 27th of December will not receive the dividend, which will be paid on the 28th of March.

The company's next dividend payment will be JP¥30.00 per share, on the back of last year when the company paid a total of JP¥60.00 to shareholders. Looking at the last 12 months of distributions, Keiyo Gas has a trailing yield of approximately 2.4% on its current stock price of JP¥2515.00. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Keiyo Gas

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, Keiyo Gas paid out 262% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. 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. Luckily it paid out just 6.3% of its free cash flow last year.

It's good to see that while Keiyo Gas's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Keiyo Gas's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 42% 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. Keiyo Gas has delivered 2.9% 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. Keiyo Gas is already paying out 262% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

Is Keiyo Gas an attractive dividend stock, or better left on the shelf? It's never great to see earnings per share declining, especially when a company is paying out 262% 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 Keiyo Gas's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Keiyo Gas.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Keiyo Gas. Our analysis shows 4 warning signs for Keiyo Gas that we strongly recommend you have a look at before investing in the company.

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.