Today we’ll take a closer look at SEIKOH GIKEN Co., Ltd. (TYO:6834) from a dividend investor’s perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
A 1.7% yield is nothing to get excited about, but investors probably think the long payment history suggests SEIKOH GIKEN has some staying power. The company also returned around 1.9% of its market capitalisation to shareholders in the form of stock buybacks over the past year. Remember that the recent share price drop will make SEIKOH GIKEN’s yield look higher, even though recent events might have impacted the company’s prospects. Some simple analysis can reduce the risk of holding SEIKOH GIKEN for its dividend, and we’ll focus on the most important aspects below.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. Looking at the data, we can see that 23% of SEIKOH GIKEN’s profits were paid out as dividends in the last 12 months. With a low payout ratio, it looks like the dividend is comprehensively covered by earnings.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. SEIKOH GIKEN’s cash payout ratio last year was 18%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It’s positive to see that SEIKOH GIKEN’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.
With a strong net cash balance, SEIKOH GIKEN investors may not have much to worry about in the near term from a dividend perspective.
Remember, you can always get a snapshot of SEIKOH GIKEN’s latest financial position, by checking our visualisation of its financial health.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. SEIKOH GIKEN has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have declined on at least one occasion over the past ten years. During the past ten-year period, the first annual payment was JP¥15.00 in 2010, compared to JP¥40.00 last year. This works out to be a compound annual growth rate (CAGR) of approximately 10% a year over that time. SEIKOH GIKEN’s dividend payments have fluctuated, so it hasn’t grown 10% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.
It’s not great to see that the payment has been cut in the past. We’re generally more wary of companies that have cut their dividend before, as they tend to perform worse in an economic downturn.
Dividend Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see SEIKOH GIKEN has grown its earnings per share at 26% per annum over the past five years. Earnings per share have grown rapidly, and the company is retaining a majority of its earnings. We think this is ideal from an investment perspective, if the company is able to reinvest these earnings effectively.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. It’s great to see that SEIKOH GIKEN is paying out a low percentage of its earnings and cash flow. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. SEIKOH GIKEN performs highly under this analysis, although it falls slightly short of our exacting standards. At the right valuation, it could be a solid dividend prospect.
Are management backing themselves to deliver performance? Check their shareholdings in SEIKOH GIKEN in our latest insider ownership analysis.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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