Why It Might Not Make Sense To Buy JPP Holding Company Limited (TWSE:5284) 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 JPP Holding Company Limited (TWSE:5284) is about to trade ex-dividend in the next 4 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. 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. Therefore, if you purchase JPP Holding's shares on or after the 10th of July, you won't be eligible to receive the dividend, when it is paid on the 31st of July.

The company's next dividend payment will be NT$5.00 per share. Last year, in total, the company distributed NT$5.00 to shareholders. Last year's total dividend payments show that JPP Holding has a trailing yield of 3.8% on the current share price of NT$130.50. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for JPP Holding

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, JPP Holding paid out 110% 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. A useful secondary check can be to evaluate whether JPP Holding generated enough free cash flow to afford its dividend. Over the past year it paid out 144% 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.

Cash is slightly more important than profit from a dividend perspective, but given JPP Holding's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

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

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see JPP Holding earnings per share are up 4.0% per annum over the last five years. Minimal earnings growth, combined with concerningly high payout ratios suggests that JPP Holding is unlikely to grow the dividend much in future, and indeed the payment could be vulnerable to a cut.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last nine years, JPP Holding has lifted its dividend by approximately 8.5% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Is JPP Holding worth buying for its dividend? The dividends are not well covered by either income or free cash flow, although at least earnings per share are slowly increasing. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that in mind though, if the poor dividend characteristics of JPP Holding don't faze you, it's worth being mindful of the risks involved with this business. Our analysis shows 2 warning signs for JPP Holding that we strongly recommend you have a look at before investing in the company.

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.

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