Japan Steel Works (TSE:5631) Will Pay A Dividend Of ¥38.00

The Japan Steel Works, Ltd. (TSE:5631) will pay a dividend of ¥38.00 on the 25th of June. Even though the dividend went up, the yield is still quite low at only 1.3%.

View our latest analysis for Japan Steel Works

Japan Steel Works' Payment Could Potentially Have Solid Earnings Coverage

The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. Based on the last payment, Japan Steel Works was earning enough to cover the dividend, but free cash flows weren't positive. With the company not bringing in any cash, paying out to shareholders is bound to become difficult at some point.

Over the next year, EPS is forecast to expand by 12.5%. If the dividend continues on this path, the payout ratio could be 35% by next year, which we think can be pretty sustainable going forward.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The annual payment during the last 10 years was ¥25.00 in 2015, and the most recent fiscal year payment was ¥76.00. This implies that the company grew its distributions at a yearly rate of about 12% over that duration. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.

Japan Steel Works May Find It Hard To Grow The Dividend

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. However, Japan Steel Works has only grown its earnings per share at 3.2% per annum over the past five years. While EPS growth is quite low, Japan Steel Works has the option to increase the payout ratio to return more cash to shareholders.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Japan Steel Works' payments are rock solid. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We would be a touch cautious of relying on this stock primarily for the dividend income.

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. Taking the debate a bit further, we've identified 2 warning signs 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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