Income Investors Should Know That Showa Sangyo Co., Ltd. (TSE:2004) Goes Ex-Dividend Soon

Showa Sangyo Co., Ltd. (TSE:2004) is about to trade ex-dividend in the next three days. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible 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 Showa Sangyo's shares before the 29th of September in order to be eligible for the dividend, which will be paid on the 3rd of December.

The company's next dividend payment will be JP¥70.00 per share, on the back of last year when the company paid a total of JP¥140 to shareholders. Calculating the last year's worth of payments shows that Showa Sangyo has a trailing yield of 3.5% on the current share price of JP¥3965.00. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Showa Sangyo 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. That's why it's good to see Showa Sangyo paying out a modest 35% of its earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Dividends consumed 54% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

See our latest analysis for Showa Sangyo

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

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's not encouraging to see that Showa Sangyo's earnings are effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share. Earnings per share growth has been slim, and the company is already paying out a majority of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Showa Sangyo has lifted its dividend by approximately 12% a year on average.

The Bottom Line

Is Showa Sangyo worth buying for its dividend? Earnings per share have been flat over the 10-year timeframe we consider, and Showa Sangyo paid out less than half its earnings and more than half its free cashflow over the last year. In summary, while it has some positive characteristics, we're not inclined to race out and buy Showa Sangyo today.

Want to learn more about Showa Sangyo? Here's a visualisation of its historical rate of revenue and earnings growth.

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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.