Japan Steel Works (TSE:5631) Has Announced A Dividend Of ¥44.00

The board of The Japan Steel Works, Ltd. (TSE:5631) has announced that it will pay a dividend on the 15th of December, with investors receiving ¥44.00 per share. Despite this raise, the dividend yield of 1.0% is only a modest boost to shareholder returns.

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Japan Steel Works' Future Dividend Projections Appear Well Covered By Earnings

It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. Based on the last payment, Japan Steel Works was earning enough to cover the dividend, but free cash flows weren't positive. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.

Over the next year, EPS is forecast to expand by 13.1%. If the dividend continues on this path, the payout ratio could be 36% by next year, which we think can be pretty sustainable going forward.

See our latest analysis for Japan Steel Works

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. The annual payment during the last 10 years was ¥20.00 in 2015, and the most recent fiscal year payment was ¥88.00. This works out to be a compound annual growth rate (CAGR) of approximately 16% a year over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

The Dividend Looks Likely To Grow

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Japan Steel Works has impressed us by growing EPS at 37% per year over the past five years. Rapid earnings growth and a low payout ratio suggest this company has been effectively reinvesting in its business. Should that continue, this company could have a bright future.

Our Thoughts On Japan Steel Works' Dividend

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. Overall, we don't think this company has the makings of a good income stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 1 warning sign for Japan Steel Works that investors need to be conscious of moving forward. Is Japan Steel Works not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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