Sumitomo Rubber Industries' (TSE:5110) Shareholders Will Receive A Bigger Dividend Than Last Year

The board of Sumitomo Rubber Industries, Ltd. (TSE:5110) has announced that it will be paying its dividend of ¥35.00 on the 5th of September, an increased payment from last year's comparable dividend. This will take the dividend yield to an attractive 3.9%, providing a nice boost to shareholder returns.

Our free stock report includes 4 warning signs investors should be aware of before investing in Sumitomo Rubber Industries. Read for free now.

Sumitomo Rubber Industries' Projections Indicate Future Payments May Be Unsustainable

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, Sumitomo Rubber Industries' dividend was higher than its profits, but the free cash flows quite comfortably covered it. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don't think there is much reason to worry.

The next 12 months is set to see EPS grow by 35.1%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 126%, which probably can't continue without putting some pressure on the balance sheet.

See our latest analysis for Sumitomo Rubber Industries

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from an annual total of ¥50.00 in 2015 to the most recent total annual payment of ¥70.00. This works out to be a compound annual growth rate (CAGR) of approximately 3.4% a year over that time. We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments the total shareholder return may be limited.

Dividend Growth May Be Hard To Achieve

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Over the past five years, it looks as though Sumitomo Rubber Industries' EPS has declined at around 4.0% a year. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this can turn into a longer term trend.

Sumitomo Rubber Industries' Dividend Doesn't Look Sustainable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We would probably look elsewhere for an income investment.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 4 warning signs for Sumitomo Rubber Industries that investors should know about before committing capital to this stock. Is Sumitomo Rubber Industries not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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