Nitto Kogyo's (TSE:6651) Shareholders Will Receive A Smaller Dividend Than Last Year

Nitto Kogyo Corporation (TSE:6651) has announced that on 9th of December, it will be paying a dividend of¥64.00, which a reduction from last year's comparable dividend. The yield is still above the industry average at 4.2%.

See our latest analysis for Nitto Kogyo

Nitto Kogyo's Dividend Is Well Covered By Earnings

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. The last dividend made up quite a large portion of free cash flows, and this was made worse by the lack of free cash flows. Generally, we think that this would be a risky long term practice.

Earnings per share is forecast to rise by 1.3% over the next year. Assuming the dividend continues along recent trends, our estimates say the payout ratio could reach 85% - on the higher side, but we wouldn't necessarily say this is unsustainable.

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. The dividend has gone from an annual total of ¥44.00 in 2014 to the most recent total annual payment of ¥128.00. This means that it has been growing its distributions at 11% per annum over that time. Nitto Kogyo has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

Dividend Growth Could Be Constrained

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. We are encouraged to see that Nitto Kogyo has grown earnings per share at 20% per year over the past five years. Recently, the company has been able to grow earnings at a decent rate, but with the payout ratio on the higher end we don't think the dividend has many prospects for growth.

Nitto Kogyo's Dividend Doesn't Look Sustainable

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. In general, the distributions are a little bit higher than we would like, but we can't ignore the fact the quickly growing earnings gives this stock great potential in the future. We would be a touch cautious of relying on this stock primarily for the dividend income.

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 picked out 1 warning sign for Nitto Kogyo that investors should know about before committing capital to this stock. Is Nitto Kogyo not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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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.