Japan Tobacco Inc.'s (TSE:2914) investors are due to receive a payment of ¥97.00 per share on 2nd of September. Although the dividend is now higher, the yield is only 4.7%, which is below the industry average.
Check out our latest analysis for Japan Tobacco
Japan Tobacco's Earnings Easily Cover The Distributions
If it is predictable over a long period, even low dividend yields can be attractive. Japan Tobacco was earning enough to cover the previous dividend, but it was paying out quite a large proportion of its free cash flows. The company is clearly earning enough to pay this type of dividend, but it is definitely focused on returning cash to shareholders, rather than growing the business.
Looking forward, earnings per share is forecast to rise by 16.1% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 66% by next year, which is in a pretty sustainable range.
Dividend Volatility
While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2014, the dividend has gone from ¥92.00 total annually to ¥194.00. This works out to be a compound annual growth rate (CAGR) of approximately 7.7% a year over that time. We have seen cuts in the past, so while the growth looks promising we would be a little bit cautious about its track record.
Dividend Growth May Be Hard To Achieve
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Earnings have grown at around 4.8% a year for the past five years, which isn't massive but still better than seeing them shrink. Growth of 4.8% may indicate that the company has limited investment opportunity so it is returning its earnings to shareholders instead. While this isn't necessarily a negative, it definitely signals that dividend growth could be constrained in the future unless earnings start to pick up again.
In Summary
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The company hasn't been paying a very consistent dividend over time, despite only paying out a small portion of earnings. This company is not in the top tier of income providing stocks.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 1 warning sign for Japan Tobacco that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About TSE:2914
Japan Tobacco
A tobacco company, manufactures and sells tobacco products, pharmaceuticals, and processed foods in Japan and internationally.
Flawless balance sheet, good value and pays a dividend.
