SMC Corporation (TSE:6273) has announced that it will pay a dividend of ¥500.00 per share on the 2nd of December. Despite this raise, the dividend yield of 1.5% is only a modest boost to shareholder returns.
Check out our latest analysis for SMC
SMC's Payment Has Solid Earnings Coverage
Even a low dividend yield can be attractive if it is sustained for years on end. Prior to this announcement, SMC's earnings easily covered the dividend, but free cash flows were negative. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.
Over the next year, EPS is forecast to expand by 8.2%. If the dividend continues along recent trends, we estimate the payout ratio will be 41%, which is in the range that makes us comfortable with the sustainability of the dividend.
Dividend Volatility
The company has a long dividend track record, but it doesn't look great with cuts in the past. The dividend has gone from an annual total of ¥160.00 in 2014 to the most recent total annual payment of ¥1000.00. This implies that the company grew its distributions at a yearly rate of about 20% over that duration. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.
We Could See SMC's Dividend Growing
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. It's encouraging to see that SMC has been growing its earnings per share at 9.6% a year over the past five years. Growth in EPS bodes well for the dividend, as does the low payout ratio that the company is currently reporting.
In Summary
In summary, while it's always good to see the dividend being raised, we don't think SMC's payments are rock solid. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We don't think SMC is a great stock to add to your portfolio if income is your focus.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Earnings growth generally bodes well for the future value of company dividend payments. See if the 14 SMC analysts we track are forecasting continued growth with our free report on analyst estimates for the company. 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:6273
SMC
Manufactures, processes, and sells automatic control equipment, sintered filters, and various types of filtration equipment worldwide.
Flawless balance sheet with moderate growth potential.
