Do These 3 Checks Before Buying Tohbu Network Co., Ltd. (TSE:9036) For Its Upcoming Dividend

Tohbu Network Co., Ltd. (TSE:9036) 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 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 Tohbu Network's shares on or after the 29th of September, you won't be eligible to receive the dividend, when it is paid on the 15th of December.

The company's upcoming dividend is JP¥10.00 a share, following on from the last 12 months, when the company distributed a total of JP¥20.00 per share to shareholders. Based on the last year's worth of payments, Tohbu Network has a trailing yield of 1.6% on the current stock price of JP¥1231.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

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Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Fortunately Tohbu Network's payout ratio is modest, at just 43% of profit. A useful secondary check can be to evaluate whether Tohbu Network generated enough free cash flow to afford its dividend. The company paid out 108% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

Tohbu Network 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.

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

View our latest analysis for Tohbu Network

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by Tohbu Network's 9.4% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Tohbu Network has delivered 7.5% dividend growth per year on average over the past four years.

To Sum It Up

From a dividend perspective, should investors buy or avoid Tohbu Network? Tohbu Network'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. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

So if you're still interested in Tohbu Network despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. We've identified 2 warning signs with Tohbu Network (at least 1 which is significant), and understanding these should be part of your investment process.

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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.