SCAT Inc. (TSE:3974) stock is about to trade ex-dividend in 2 days. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the 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. Accordingly, SCAT investors that purchase the stock on or after the 29th of October will not receive the dividend, which will be paid on the 13th of January.
The company's next dividend payment will be JP¥7.50 per share, on the back of last year when the company paid a total of JP¥15.00 to shareholders. Based on the last year's worth of payments, SCAT has a trailing yield of 2.2% on the current stock price of JP¥671.00. If you buy this business for its dividend, you should have an idea of whether SCAT's dividend is reliable and sustainable. 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. Fortunately SCAT's payout ratio is modest, at just 38% of profit. 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. SCAT paid out more free cash flow than it generated - 131%, 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.
SCAT does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.
While SCAT'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 SCAT to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
View our latest analysis for SCAT
Click here to see how much of its profit SCAT paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Fortunately for readers, SCAT's earnings per share have been growing at 17% a year for the past five years. Earnings have been growing at a decent 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. In the last nine years, SCAT has lifted its dividend by approximately 9.4% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
The Bottom Line
From a dividend perspective, should investors buy or avoid SCAT? We like that SCAT has been successfully growing its earnings per share at a nice rate and reinvesting most of its profits in the business. However, we note the high cashflow payout ratio with some concern. All things considered, we are not particularly enthused about SCAT from a dividend perspective.
While it's tempting to invest in SCAT for the dividends alone, you should always be mindful of the risks involved. Our analysis shows 2 warning signs for SCAT and you should be aware of these before buying any shares.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
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