Is Johnan Academic Preparatory Institute, Inc. (TYO:4720) A Smart Choice For Dividend Investors?

Today we'll take a closer look at Johnan Academic Preparatory Institute, Inc. (TYO:4720) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. 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.

Investors might not know much about Johnan Academic Preparatory Institute's dividend prospects, even though it has been paying dividends for the last seven years and offers a 1.3% yield. While the yield may not look too great, the relatively long payment history is interesting. 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 Johnan Academic Preparatory Institute!

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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. We'd say its dividends are thoroughly covered by earnings.

Last year, Johnan Academic Preparatory Institute paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

With a strong net cash balance, Johnan Academic Preparatory Institute investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on Johnan Academic Preparatory Institute's 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. Looking at the data, we can see that Johnan Academic Preparatory Institute has been paying a dividend for the past seven years. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we're cautious about the consistency of its dividend across a full economic cycle. During the past seven-year period, the first annual payment was JP¥8.0 in 2014, compared to JP¥5.0 last year. This works out to be a decline of approximately 6.5% per year over that time. Johnan Academic Preparatory Institute's dividend hasn't shrunk linearly at 6.5% per annum, but the CAGR is a useful estimate of the historical rate of change.

A shrinking dividend over a seven-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Earnings have grown at around 7.7% a year for the past five years, which is better than seeing them shrink! A low payout ratio and strong historical earnings growth suggests Johnan Academic Preparatory Institute has been effectively reinvesting in its business. We think this generally bodes well for its dividend prospects.

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. First, we like Johnan Academic Preparatory Institute's low dividend payout ratio, although we're a bit concerned that it paid out a substantially higher percentage of its free cash flow. Unfortunately, earnings growth has also been mediocre, and the company has cut its dividend at least once in the past. In sum, we find it hard to get excited about Johnan Academic Preparatory Institute from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come accross 3 warning signs for Johnan Academic Preparatory Institute you should be aware of, and 1 of them is a bit concerning.

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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