Is It Worth Considering Chugai Pharmaceutical Co., Ltd. (TSE:4519) For Its Upcoming Dividend?

It looks like Chugai Pharmaceutical Co., Ltd. (TSE:4519) is about to go ex-dividend in the next two days. The ex-dividend date generally occurs two days before the record date, which is the day on which shareholders need to be on the company’s books in order to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. Accordingly, Chugai Pharmaceutical investors that purchase the stock on or after the 29th of June will not receive the dividend, which will be paid on the 28th of August.

The company’s next dividend payment will be JP¥66.00 per share. Last year, in total, the company distributed JP¥132 to shareholders. Based on the last year’s worth of payments, Chugai Pharmaceutical has a trailing yield of 1.8% on the current stock price of JP¥7534.00. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it’s growing.

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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 Chugai Pharmaceutical paying out a modest 44% of its earnings. A useful secondary check can be to evaluate whether Chugai Pharmaceutical generated enough free cash flow to afford its dividend. Over the past year it paid out 135% of its free cash flow as dividends, which is uncomfortably high. It’s hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we’d wonder how the company justifies this payout level.

While Chugai Pharmaceutical’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 Chugai Pharmaceutical to repeatedly pay dividends that aren’t well covered by cashflow, we would consider this a warning sign.

View our latest analysis for Chugai Pharmaceutical

Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.

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. For this reason, we’re glad to see Chugai Pharmaceutical’s earnings per share have risen 16% per annum over the last 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.

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, Chugai Pharmaceutical has lifted its dividend by approximately 23% a year on average. It’s great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

To Sum It Up

Is Chugai Pharmaceutical worth buying for its dividend? We like that Chugai Pharmaceutical 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. Overall, it’s not a bad combination, but we feel that there are likely more attractive dividend prospects out there.

In light of that, while Chugai Pharmaceutical has an appealing dividend, it’s worth knowing the risks involved with this stock. Our analysis shows 1 warning sign for Chugai Pharmaceutical and you should be aware of this before buying any shares.

If you’re in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.