The Case For McDonald's Holdings Company (Japan), Ltd. (TYO:2702): Could It Be A Nice Addition To Your Dividend Portfolio?

Dividend paying stocks like McDonald's Holdings Company (Japan), Ltd. (TYO:2702) 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. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

A 0.7% yield is nothing to get excited about, but investors probably think the long payment history suggests McDonald's Holdings Company (Japan) has some staying power. There are a few simple ways to reduce the risks of buying McDonald's Holdings Company (Japan) for its dividend, and we'll go through these below.

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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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. McDonald's Holdings Company (Japan) paid out 24% of its profit as dividends, over the trailing twelve month period. With a low payout ratio, it looks like the dividend is comprehensively covered by earnings.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. McDonald's Holdings Company (Japan) paid out 64% of its cash flow as dividends last year, which is within a reasonable range for the average corporation. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

Remember, you can always get a snapshot of McDonald's Holdings Company (Japan)'s latest financial position, by checking our visualisation of its financial health.

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 McDonald's Holdings Company (Japan)'s 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¥30.0 in 2011, compared to JP¥36.0 last year. This works out to be a compound annual growth rate (CAGR) of approximately 1.8% a year over that time.

Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see McDonald's Holdings Company (Japan) has grown its earnings per share at 38% per annum over the past five years. Earnings per share have grown rapidly, and the company is retaining a majority of its earnings. We think this is ideal from an investment perspective, if the company is able to reinvest these earnings effectively.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Above all, we're glad to see that McDonald's Holdings Company (Japan) pays out a low fraction of its earnings and, while it paid a higher percentage of cashflow, this also was within a normal range. Next, growing earnings per share and steady dividend payments is a great combination. McDonald's Holdings Company (Japan) performs highly under this analysis, although it falls slightly short of our exacting standards. At the right valuation, it could be a solid dividend prospect.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Are management backing themselves to deliver performance? Check their shareholdings in McDonald's Holdings Company (Japan) in our latest insider ownership analysis.

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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