Japan Tobacco (TSE:2914) Is Increasing Its Dividend To ¥130.00

Japan Tobacco Inc. (TSE:2914) will increase its dividend from last year's comparable payment on the 27th of March to ¥130.00. This takes the annual payment to 4.8% of the current stock price, which is about average for the industry.

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Japan Tobacco's Payment Could Potentially Have Solid Earnings Coverage

While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. The last payment was quite easily covered by earnings, but it made up 124% of cash flows. This signals that the company is more focused on returning cash flow to shareholders, but it could mean that the dividend is exposed to cuts in the future.

Looking forward, earnings per share is forecast to rise by 8.8% over the next year. If the dividend continues on this path, the payout ratio could be 74% by next year, which we think can be pretty sustainable going forward.

Check out our latest analysis for Japan Tobacco

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2015, the dividend has gone from ¥108.00 total annually to ¥260.00. This implies that the company grew its distributions at a yearly rate of about 9.2% over that duration. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Japan Tobacco might have put its house in order since then, but we remain cautious.

The Dividend Looks Likely To Grow

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. We are encouraged to see that Japan Tobacco has grown earnings per share at 13% per year over the past five years. The company is paying out a lot of its cash as a dividend, but it looks okay based on the payout ratio.

Our Thoughts On Japan Tobacco's Dividend

Overall, we always like to see the dividend being raised, but we don't think Japan Tobacco will make a great income stock. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We would be a touch cautious of relying on this stock primarily for the dividend income.

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. Taking the debate a bit further, we've identified 1 warning sign for Japan Tobacco that investors need to be conscious of moving forward. Is Japan Tobacco not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.