Stock Analysis

Should Shoei Yakuhin Co.,Ltd. (TYO:3537) Be Part Of Your Dividend Portfolio?

TSE:3537
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Is Shoei Yakuhin Co.,Ltd. (TYO:3537) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

With a 1.9% yield and a five-year payment history, investors probably think Shoei YakuhinLtd looks like a reliable dividend stock. While the yield may not look too great, the relatively long payment history is interesting. The company also returned around 3.4% of its market capitalisation to shareholders in the form of stock buybacks over the past year. There are a few simple ways to reduce the risks of buying Shoei YakuhinLtd for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Shoei YakuhinLtd!

historic-dividend
JASDAQ:3537 Historic Dividend February 8th 2021

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Shoei YakuhinLtd paid out 33% of its profit as dividends. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Shoei YakuhinLtd's cash payout ratio last year was 17%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout. It's positive to see that Shoei YakuhinLtd'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.

While the above analysis focuses on dividends relative to a company's earnings, we do note Shoei YakuhinLtd's strong net cash position, which will let it pay larger dividends for a time, should it choose.

Consider getting our latest analysis on Shoei YakuhinLtd's financial position here.

Dividend Volatility

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. Shoei YakuhinLtd has been paying a dividend for the past five years. During the past five-year period, the first annual payment was JP¥13.3 in 2016, compared to JP¥18.0 last year. Dividends per share have grown at approximately 6.2% per year over this time.

The dividend has been growing at a reasonable rate, which we like. We're conscious though that one of the best ways to detect a multi-decade consistent dividend-payer, is to watch a company pay dividends for 20 years - a distinction Shoei YakuhinLtd has not achieved yet.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Shoei YakuhinLtd's EPS have fallen by approximately 27% per year during the past five years. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

Conclusion

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. Firstly, we like that Shoei YakuhinLtd has low and conservative payout ratios. Second, earnings per share have been in decline, and the dividend history is shorter than we'd like. Ultimately, Shoei YakuhinLtd 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.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 3 warning signs for Shoei YakuhinLtd (1 is a bit unpleasant!) that you should be aware of before investing.

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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