Here's Why We're Wary Of Buying Ichibanya's (TSE:7630) For Its Upcoming Dividend
Readers hoping to buy Ichibanya Co., Ltd. (TSE:7630) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date generally occurs two days 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. 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. This means that investors who purchase Ichibanya's shares on or after the 28th of August will not receive the dividend, which will be paid on the 16th of November.
The company's next dividend payment will be JP¥8.00 per share, on the back of last year when the company paid a total of JP¥16.00 to shareholders. Based on the last year's worth of payments, Ichibanya stock has a trailing yield of around 1.7% on the current share price of JP¥947.00. 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! We need to see whether the dividend is covered by earnings and if it's 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 Ichibanya paid out 108% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether Ichibanya generated enough free cash flow to afford its dividend. Over the past year it paid out 131% 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 Ichibanya's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.
View our latest analysis for Ichibanya
Click here to see how much of its profit Ichibanya 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 Ichibanya earnings per share are up 6.4% per annum over the last five years. Earnings per share have been growing steadily, although a payout ratio this high suggests future growth is likely to slow, and the dividend may also be at risk of a cut if business enters a downturn.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Ichibanya has increased its dividend at approximately 4.3% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
To Sum It Up
Has Ichibanya got what it takes to maintain its dividend payments? Ichibanya is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, although at least earnings per share are growing somewhat. It's not that we think Ichibanya is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
With that in mind though, if the poor dividend characteristics of Ichibanya don't faze you, it's worth being mindful of the risks involved with this business. To help with this, we've discovered 2 warning signs for Ichibanya that you should be aware of before investing in their shares.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.