Here's Why We're Wary Of Buying E-Guardian's (TSE:6050) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see E-Guardian Inc. (TSE:6050) is about to trade ex-dividend in the next three days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled 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. In other words, investors can purchase E-Guardian's shares before the 29th of September in order to be eligible for the dividend, which will be paid on the 18th of December.

The company's next dividend payment will be JP¥38.00 per share. Last year, in total, the company distributed JP¥38.00 to shareholders. Calculating the last year's worth of payments shows that E-Guardian has a trailing yield of 2.1% on the current share price of JP¥1812.00. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

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If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. E-Guardian is paying out an acceptable 55% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether E-Guardian generated enough free cash flow to afford its dividend. It paid out more than half (51%) of its free cash flow in the past year, which is within an average range for most companies.

It's positive to see that E-Guardian's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Check out our latest analysis for E-Guardian

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see E-Guardian's earnings per share have dropped 6.4% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, E-Guardian has lifted its dividend by approximately 32% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.

To Sum It Up

Has E-Guardian got what it takes to maintain its dividend payments? While earnings per share are shrinking, it's encouraging to see that at least E-Guardian's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. It's not that we think E-Guardian is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Curious what other investors think of E-Guardian? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

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.

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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.