Should Income Investors Look At Araya Industrial Co., Ltd. (TSE:7305) Before Its Ex-Dividend?

It looks like Araya Industrial Co., Ltd. (TSE:7305) is about to go ex-dividend in the next 3 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 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. Meaning, you will need to purchase Araya Industrial's shares before the 29th of September to receive the dividend, which will be paid on the 4th of December.

The company's next dividend payment will be JP¥50.00 per share, and in the last 12 months, the company paid a total of JP¥150 per share. Calculating the last year's worth of payments shows that Araya Industrial has a trailing yield of 5.4% on the current share price of JP¥2773.00. If you buy this business for its dividend, you should have an idea of whether Araya Industrial's dividend is reliable and sustainable. So we need to investigate whether Araya Industrial can afford its dividend, and if the dividend could grow.

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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. Its dividend payout ratio is 88% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. It could become a concern if earnings started to decline. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the last year, it paid out more than three-quarters (76%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's positive to see that Araya Industrial'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.

See our latest analysis for Araya Industrial

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

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Araya Industrial earnings per share are up 9.4% per annum over the last five years. Decent historical earnings per share growth suggests Araya Industrial has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Araya Industrial has delivered an average of 22% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Is Araya Industrial an attractive dividend stock, or better left on the shelf? Earnings per share have been growing modestly and Araya Industrial paid out a bit over half of its earnings and free cash flow last year. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Araya Industrial's dividend merits.

If you're not too concerned about Araya Industrial's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. For example, Araya Industrial has 2 warning signs (and 1 which is a bit concerning) we think 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.

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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.