Don't Race Out To Buy Nippon Carbon Co., Ltd. (TSE:5302) Just Because It's Going Ex-Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Nippon Carbon Co., Ltd. (TSE:5302) is about to go ex-dividend in just four 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. Thus, you can purchase Nippon Carbon's shares before the 29th of December in order to receive the dividend, which the company will pay on the 31st of March.

The company's upcoming dividend is JP¥100.00 a share, following on from the last 12 months, when the company distributed a total of JP¥200 per share to shareholders. Last year's total dividend payments show that Nippon Carbon has a trailing yield of 4.5% on the current share price of JP¥4470.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

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Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Nippon Carbon paid out a comfortable 38% of its profit last year. A useful secondary check can be to evaluate whether Nippon Carbon generated enough free cash flow to afford its dividend. Nippon Carbon paid out more free cash flow than it generated - 166%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

While Nippon Carbon's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Nippon Carbon to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

View our latest analysis for Nippon Carbon

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Nippon Carbon's earnings per share have fallen at approximately 9.8% a year over the previous 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. Nippon Carbon has delivered 15% dividend growth per year on average over the past 10 years.

Final Takeaway

Should investors buy Nippon Carbon for the upcoming dividend? Nippon Carbon'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. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Although, if you're still interested in Nippon Carbon and want to know more, you'll find it very useful to know what risks this stock faces. For instance, we've identified 3 warning signs for Nippon Carbon (1 shouldn't be ignored) you should be aware of.

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.