We Wouldn't Be Too Quick To Buy Tokushu Tokai Paper Co., Ltd. (TSE:3708) Before It Goes Ex-Dividend
Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Tokushu Tokai Paper Co., Ltd. (TSE:3708) is about to trade ex-dividend in the next 3 days. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. This means that investors who purchase Tokushu Tokai Paper's shares on or after the 29th of September will not receive the dividend, which will be paid on the 7th of December.
The company's next dividend payment will be JP¥47.00 per share, on the back of last year when the company paid a total of JP¥94.00 to shareholders. Looking at the last 12 months of distributions, Tokushu Tokai Paper has a trailing yield of approximately 4.2% on its current stock price of JP¥2227.00. 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.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. That's why it's good to see Tokushu Tokai Paper paying out a modest 40% of its earnings. 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. It paid out 99% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.
While Tokushu Tokai Paper'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 Tokushu Tokai Paper to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
View our latest analysis for Tokushu Tokai Paper
Click here to see how much of its profit Tokushu Tokai Paper paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings fall far enough, the company could be forced to cut its dividend. It's not encouraging to see that Tokushu Tokai Paper's earnings are effectively flat 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. Since the start of our data, 10 years ago, Tokushu Tokai Paper has lifted its dividend by approximately 19% a year on average.
The Bottom Line
Is Tokushu Tokai Paper worth buying for its dividend? It's disappointing to see earnings per share have fallen slightly, even though Tokushu Tokai Paper 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. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Tokushu Tokai Paper.
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 Tokushu Tokai Paper. Every company has risks, and we've spotted 2 warning signs for Tokushu Tokai Paper (of which 1 makes us a bit uncomfortable!) you should know about.
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.