Why It Might Not Make Sense To Buy Ozu Corporation (TSE:7487) For Its Upcoming Dividend

Ozu Corporation (TSE:7487) is about to trade ex-dividend in the next three days. The ex-dividend date is commonly two business days before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. Therefore, if you purchase Ozu's shares on or after the 28th of May, you won't be eligible to receive the dividend, when it is paid on the 28th of August.

The company's next dividend payment will be JP¥25.00 per share, and in the last 12 months, the company paid a total of JP¥25.00 per share. Looking at the last 12 months of distributions, Ozu has a trailing yield of approximately 1.3% on its current stock price of JP¥1909.00. 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 Ozu has been able to grow its dividends, or if the dividend might be cut.

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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. Fortunately Ozu's payout ratio is modest, at just 40% of profit. A useful secondary check can be to evaluate whether Ozu generated enough free cash flow to afford its dividend. Over the last year, it paid out dividends equivalent to 307% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how Ozu intends to continue funding this dividend, or if it could be forced to cut the payment.

Ozu 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.

Ozu paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Ozu to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Check out our latest analysis for Ozu

Click here to see how much of its profit Ozu 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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That explains why we're not overly excited about Ozu's flat earnings over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully 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 past 10 years, Ozu has increased its dividend at approximately 5.2% a year on average.

To Sum It Up

Should investors buy Ozu for the upcoming dividend? It's disappointing to see earnings per share have fallen slightly, even though Ozu 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. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that in mind though, if the poor dividend characteristics of Ozu don't faze you, it's worth being mindful of the risks involved with this business. Our analysis shows 1 warning sign for Ozu and you should be aware of this before buying any shares.

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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.