Is HIRAYAMA HOLDINGS Co.,Ltd. (TYO:7781) The Right Choice For A Smart Dividend Investor?

Dividend paying stocks like HIRAYAMA HOLDINGS Co.,Ltd. (TYO:7781) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

Investors might not know much about HIRAYAMA HOLDINGSLtd's dividend prospects, even though it has been paying dividends for the last five years and offers a 2.5% yield. A low yield is generally a turn-off, but if the prospects for earnings growth were strong, investors might be pleasantly surprised by the long-term results. The company also bought back stock equivalent to around 1.9% of market capitalisation this year. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

Explore this interactive chart for our latest analysis on HIRAYAMA HOLDINGSLtd!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, 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. Looking at the data, we can see that 32% of HIRAYAMA HOLDINGSLtd's profits were paid out as dividends in the last 12 months. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. Plus, there is room to increase the payout ratio over time.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. HIRAYAMA HOLDINGSLtd paid out 22% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable. It's positive to see that HIRAYAMA HOLDINGSLtd's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

While the above analysis focuses on dividends relative to a company's earnings, we do note HIRAYAMA HOLDINGSLtd's strong net cash position, which will let it pay larger dividends for a time, should it choose.

Consider getting our latest analysis on HIRAYAMA HOLDINGSLtd's financial position here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. HIRAYAMA HOLDINGSLtd has been paying a dividend for the past five years. During the past five-year period, the first annual payment was JP¥18.7 in 2016, compared to JP¥30.0 last year. Dividends per share have grown at approximately 10.0% per year over this time. HIRAYAMA HOLDINGSLtd's dividend payments have fluctuated, so it hasn't grown 10.0% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Earnings have grown at around 5.9% a year for the past five years, which is better than seeing them shrink! It's good to see decent earnings growth and a low payout ratio. Companies with these characteristics often display the fastest dividend growth over the long term - assuming earnings can be maintained, of course.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. First, we like that the company's dividend payments appear well covered, although the retained capital also needs to be effectively reinvested. Unfortunately, earnings growth has also been mediocre, and the company has cut its dividend at least once in the past. Overall we think HIRAYAMA HOLDINGSLtd is an interesting dividend stock, although it could be better.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 3 warning signs for HIRAYAMA HOLDINGSLtd that investors need to be conscious of moving forward.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 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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