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 Tohoku Chemical Co., Ltd. (TSE:7446) is about to go ex-dividend in just 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 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. Meaning, you will need to purchase Tohoku Chemical's shares before the 29th of September to receive the dividend, which will be paid on the 21st of December.
The company's next dividend payment will be JP¥105.00 per share. Last year, in total, the company distributed JP¥105 to shareholders. Based on the last year's worth of payments, Tohoku Chemical has a trailing yield of 2.4% on the current stock price of JP¥4460.00. If you buy this business for its dividend, you should have an idea of whether Tohoku Chemical's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
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. Tohoku Chemical paid out just 16% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. 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. Luckily it paid out just 4.1% of its free cash flow last year.
It's positive to see that Tohoku Chemical'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 Tohoku Chemical
Click here to see how much of its profit Tohoku Chemical 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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fortunately for readers, Tohoku Chemical's earnings per share have been growing at 10% a year for the past five years. Earnings per share have been growing rapidly and the company is retaining a majority of its earnings within the business. This will make it easier to fund future growth efforts and we think this is an attractive combination - plus the dividend can always be increased later.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, Tohoku Chemical has lifted its dividend by approximately 3.4% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Tohoku Chemical is keeping back more of its profits to grow the business.
The Bottom Line
From a dividend perspective, should investors buy or avoid Tohoku Chemical? Tohoku Chemical has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. There's a lot to like about Tohoku Chemical, and we would prioritise taking a closer look at it.
In light of that, while Tohoku Chemical has an appealing dividend, it's worth knowing the risks involved with this stock. To that end, you should learn about the 2 warning signs we've spotted with Tohoku Chemical (including 1 which is a bit concerning).
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.