Is Toshin Group Co.,Ltd. (TYO:2761) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
A slim 0.9% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Toshin GroupLtd could have potential. There are a few simple ways to reduce the risks of buying Toshin GroupLtd for its dividend, and we'll go through these below.
Dividends are usually paid out of company earnings. If a company is paying more than it earns, 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 31% of Toshin GroupLtd's profits were paid out as dividends in the last 12 months. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Toshin GroupLtd paid out 123% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. Toshin GroupLtd paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough free cash flow to cover the dividend. Cash is king, as they say, and were Toshin GroupLtd to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
While the above analysis focuses on dividends relative to a company's earnings, we do note Toshin GroupLtd's strong net cash position, which will let it pay larger dividends for a time, should it choose.
We update our data on Toshin GroupLtd every 24 hours, so you can always get our latest analysis of its financial health, here.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Toshin GroupLtd has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past 10-year period, the first annual payment was JP¥50.0 in 2011, compared to JP¥56.0 last year. This works out to be a compound annual growth rate (CAGR) of approximately 1.1% a year over that time.
While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is unappealing.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. It's not great to see that Toshin GroupLtd's have fallen at approximately 3.8% over the past five years. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.
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. Toshin GroupLtd has a low payout ratio, which we like, although it paid out virtually all of its generated cash. It's not great to see earnings per share shrinking. The dividends have been relatively consistent, but we wonder for how much longer this will be true. Ultimately, Toshin GroupLtd comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Now, if you want to look closer, it would be worth checking out our free research on Toshin GroupLtd management tenure, salary, and performance.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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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. 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.
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