The board of The Japan Steel Works, Ltd. (TSE:5631) has announced that it will pay a dividend on the 28th of June, with investors receiving ¥29.00 per share. This payment means that the dividend yield will be 2.0%, which is around the industry average.
See our latest analysis for Japan Steel Works
Japan Steel Works' Dividend Is Well Covered By Earnings
Unless the payments are sustainable, the dividend yield doesn't mean too much. Prior to this announcement, Japan Steel Works' earnings easily covered the dividend, but free cash flows were negative. 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.
The next year is set to see EPS grow by 26.9%. If the dividend continues on this path, the payout ratio could be 21% by next year, which we think can be pretty sustainable going forward.
Dividend Volatility
While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2014, the annual payment back then was ¥25.00, compared to the most recent full-year payment of ¥58.00. This means that it has been growing its distributions at 8.8% per annum over that time. We like to see dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.
Japan Steel Works May Find It Hard To Grow The Dividend
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. Earnings has been rising at 3.4% per annum over the last five years, which admittedly is a bit slow. While growth may be thin on the ground, Japan Steel Works could always pay out a higher proportion of earnings to increase shareholder returns.
In Summary
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Japan Steel Works' payments, as there could be some issues with sustaining them into the future. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We don't think Japan Steel Works is a great stock to add to your portfolio if income is your focus.
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 2 warning signs for Japan Steel Works that investors should know about before committing capital to this stock. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
About TSE:5631
Japan Steel Works
Engages in the provision of industrial machinery products, and material and engineering business in Japan and internationally.
Excellent balance sheet with moderate growth potential.
