Why It Might Not Make Sense To Buy Daiken Medical Co., Ltd. (TSE:7775) For Its Upcoming Dividend
Daiken Medical Co., Ltd. (TSE:7775) stock is about to trade ex-dividend in three days. The ex-dividend date is commonly two business days before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. Meaning, you will need to purchase Daiken Medical's shares before the 29th of September to receive the dividend, which will be paid on the 1st of December.
The company's upcoming dividend is JP¥9.00 a share, following on from the last 12 months, when the company distributed a total of JP¥20.00 per share to shareholders. Calculating the last year's worth of payments shows that Daiken Medical has a trailing yield of 4.7% on the current share price of JP¥424.00. 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.
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. Daiken Medical paid out 67% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Daiken Medical generated enough free cash flow to afford its dividend. It paid out an unsustainably high 275% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since Daiken Medical is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.
While Daiken Medical'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. Were this to happen repeatedly, this would be a risk to Daiken Medical's ability to maintain its dividend.
Check out our latest analysis for Daiken Medical
Click here to see how much of its profit Daiken Medical 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 Daiken Medical earnings per share are up 5.3% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Daiken Medical has seen its dividend decline 0.5% per annum on average over the past nine years, which is not great to see.
Final Takeaway
Should investors buy Daiken Medical for the upcoming dividend? Earnings per share have grown somewhat, although Daiken Medical paid out over half its profits and the dividend was not well covered by free cash flow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.
With that in mind though, if the poor dividend characteristics of Daiken Medical don't faze you, it's worth being mindful of the risks involved with this business. Every company has risks, and we've spotted 3 warning signs for Daiken Medical (of which 1 is concerning!) 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.