Is Higashimaru Co.,Ltd. (FKSE:2058) A Strong Dividend Stock?

Dividend paying stocks like Higashimaru Co.,Ltd. (FKSE:2058) 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 slim 1.0% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, HigashimaruLtd could have potential. The company also returned around 20% of its market capitalisation to shareholders in the form of stock buybacks over the past year. There are a few simple ways to reduce the risks of buying HigashimaruLtd for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on HigashimaruLtd!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Although it reported a loss over the past 12 months, HigashimaruLtd currently pays a dividend. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

HigashimaruLtd's cash payout ratio last year was 15%, which is quite low and suggests that the dividend was thoroughly covered by cash flow.

Consider getting our latest analysis on HigashimaruLtd'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. For the purpose of this article, we only scrutinise the last decade of HigashimaruLtd's dividend payments. This dividend has been unstable, which we define as having been cut one or more times over this time. Its most recent annual dividend was JP¥9.0 per share, effectively flat on its first payment 10 years ago.

It's good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth, anyway. We're not that enthused by this.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Over the past five years, it looks as though HigashimaruLtd's EPS have declined at around 59% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and HigashimaruLtd's earnings per share, which support the dividend, have been anything but stable.

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. We're not keen on the fact that HigashimaruLtd paid dividends despite reporting a loss over the past year, although fortunately its dividend was covered by cash flow. Earnings per share are down, and HigashimaruLtd's dividend has been cut at least once in the past, which is disappointing. Overall, HigashimaruLtd falls short in several key areas here. Unless the investor has strong grounds for an alternative conclusion, we find it hard to get interested in a dividend stock with these characteristics.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Just as an example, we've come accross 3 warning signs for HigashimaruLtd you should be aware of, and 2 of them are a bit unpleasant.

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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