It Might Not Be A Great Idea To Buy Towa Pharmaceutical Co., Ltd. (TSE:4553) For Its Next Dividend

Towa Pharmaceutical Co., Ltd. (TSE:4553) stock is about to trade ex-dividend in four days. 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. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase Towa Pharmaceutical's shares before the 29th of September in order to be eligible for the dividend, which will be paid on the 1st of December.

The company's upcoming dividend is JP¥40.00 a share, following on from the last 12 months, when the company distributed a total of JP¥85.00 per share to shareholders. Last year's total dividend payments show that Towa Pharmaceutical has a trailing yield of 2.3% on the current share price of JP¥3700.00. If you buy this business for its dividend, you should have an idea of whether Towa Pharmaceutical's dividend is reliable and sustainable. As a result, readers should always check whether Towa Pharmaceutical has been able to grow its dividends, or if the dividend might be cut.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

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 Towa Pharmaceutical paying out a modest 48% of its earnings. A useful secondary check can be to evaluate whether Towa Pharmaceutical generated enough free cash flow to afford its dividend. Over the past year it paid out 167% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

While Towa Pharmaceutical'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 Towa Pharmaceutical to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

See our latest analysis for Towa Pharmaceutical

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Towa Pharmaceutical's earnings per share have fallen at approximately 9.9% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Towa Pharmaceutical has lifted its dividend by approximately 10% a year on average.

The Bottom Line

From a dividend perspective, should investors buy or avoid Towa Pharmaceutical? Towa Pharmaceutical's earnings per share have fallen noticeably and, although it paid out less than half its profit as dividends last year, it paid out a disconcertingly high percentage of its cashflow, which is not a great combination. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Although, if you're still interested in Towa Pharmaceutical and want to know more, you'll find it very useful to know what risks this stock faces. Every company has risks, and we've spotted 4 warning signs for Towa Pharmaceutical (of which 1 can't be ignored!) you should know about.

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.

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

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.