Should You Buy nms Holdings Corporation (TYO:2162) For Its 1.7% Dividend?

Is nms Holdings Corporation (TYO:2162) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

While nms Holdings's 1.7% dividend yield is not the highest, we think its lengthy payment history is quite interesting. The company also returned around 2.8% of its market capitalisation to shareholders in the form of stock buybacks over the past year. Some simple research can reduce the risk of buying nms Holdings for its dividend - read on to learn more.

Click the interactive chart for our full dividend analysis

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. While nms Holdings pays a dividend, it reported a loss over the last year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

nms Holdings paid out 213% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely.

Consider getting our latest analysis on nms Holdings' financial position here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. For the purpose of this article, we only scrutinise the last decade of nms Holdings' dividend payments. The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past 10-year period, the first annual payment was JP¥0.5 in 2010, compared to JP¥5.0 last year. This works out to be a compound annual growth rate (CAGR) of approximately 26% a year over that time.

With rapid dividend growth and no notable cuts to the dividend over a lengthy period of time, we think this company has a lot going for it.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. nms Holdings' earnings per share have shrunk at 13% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and nms Holdings' earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that nms Holdings' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're a bit uncomfortable with nms Holdings paying a dividend while loss-making, especially since the dividend was also not well covered by free cash flow. Second, earnings per share have actually shrunk, but at least the dividends have been relatively stable. Using these criteria, nms Holdings looks quite suboptimal from a dividend investment perspective.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 4 warning signs for nms Holdings (of which 2 are significant!) you should know about.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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This article by Simply Wall St is general in nature. 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.
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