Dividend Investors: Don't Be Too Quick To Buy MEITEC Group Holdings Inc. (TSE:9744) 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 MEITEC Group Holdings Inc. (TSE:9744) 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. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase MEITEC Group Holdings' shares before the 29th of September in order to receive the dividend, which the company will pay on the 30th of November.

The company's upcoming dividend is JP¥85.00 a share, following on from the last 12 months, when the company distributed a total of JP¥181 per share to shareholders. Last year's total dividend payments show that MEITEC Group Holdings has a trailing yield of 5.2% on the current share price of JP¥3482.00. If you buy this business for its dividend, you should have an idea of whether MEITEC Group Holdings's dividend is reliable and sustainable. As a result, readers should always check whether MEITEC Group Holdings has been able to grow its dividends, or if the dividend might be cut.

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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. MEITEC Group Holdings paid out 99% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. A useful secondary check can be to evaluate whether MEITEC Group Holdings generated enough free cash flow to afford its dividend. It paid out 101% of its free cash flow in the form of dividends last year, which is outside the comfort zone 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.

MEITEC Group Holdings 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.

As MEITEC Group Holdings's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

View our latest analysis for MEITEC Group Holdings

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

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. For this reason, we're glad to see MEITEC Group Holdings's earnings per share have risen 18% per annum over the last five years. It's not encouraging to see MEITEC Group Holdings paying out basically all of its earnings and cashflow to shareholders. We're glad that earnings are growing rapidly, but we're wary of the company stretching itself financially.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. MEITEC Group Holdings has delivered 16% dividend growth per year on average over the past 10 years. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

To Sum It Up

Is MEITEC Group Holdings worth buying for its dividend? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. It's not that we think MEITEC Group Holdings is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering MEITEC Group Holdings as an investment, you'll find it beneficial to know what risks this stock is facing. In terms of investment risks, we've identified 1 warning sign with MEITEC Group Holdings and understanding them should be part of your investment process.

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.