Dividend Investors: Don't Be Too Quick To Buy Ko Ja (Cayman) Co., Ltd. (TWSE:5215) For Its Upcoming Dividend

Ko Ja (Cayman) Co., Ltd. (TWSE:5215) stock is about to trade ex-dividend in three days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase Ko Ja (Cayman)'s shares on or after the 9th of July will not receive the dividend, which will be paid on the 31st of July.

The company's next dividend payment will be NT$1.50 per share, on the back of last year when the company paid a total of NT$1.50 to shareholders. Last year's total dividend payments show that Ko Ja (Cayman) has a trailing yield of 2.8% on the current share price of NT$53.50. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Ko Ja (Cayman) has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Ko Ja (Cayman)

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Fortunately Ko Ja (Cayman)'s payout ratio is modest, at just 48% of profit. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the past year it paid out 178% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Ko Ja (Cayman) 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 Ko Ja (Cayman)'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. Cash is king, as they say, and were Ko Ja (Cayman) to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit Ko Ja (Cayman) 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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That explains why we're not overly excited about Ko Ja (Cayman)'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.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Ko Ja (Cayman) has lifted its dividend by approximately 1.4% a year on average.

Final Takeaway

Is Ko Ja (Cayman) worth buying for its dividend? It's disappointing to see earnings per share have fallen slightly, even though Ko Ja (Cayman) 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. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Although, if you're still interested in Ko Ja (Cayman) and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 3 warning signs for Ko Ja (Cayman) (1 shouldn't be ignored!) that deserve your attention before investing in the shares.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com