Investors In LONG LIFE HOLDING Co., Ltd. (TYO:4355) Should Consider This, First

Is LONG LIFE HOLDING Co., Ltd. (TYO:4355) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

A 2.8% yield is nothing to get excited about, but investors probably think the long payment history suggests LONG LIFE HOLDING has some staying power. Some simple research can reduce the risk of buying LONG LIFE HOLDING for its dividend - read on to learn more.

Click the interactive chart for our full dividend analysis

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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Looking at the data, we can see that 41% of LONG LIFE HOLDING's profits were paid out as dividends in the last 12 months. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. Plus, there is room to increase the payout ratio over time.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Last year, LONG LIFE HOLDING paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

Remember, you can always get a snapshot of LONG LIFE HOLDING's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of LONG LIFE HOLDING's dividend payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was JP¥2.5 in 2011, compared to JP¥8.0 last year. This works out to be a compound annual growth rate (CAGR) of approximately 12% a year over that time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

LONG LIFE HOLDING has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, but it might be worth considering if the business has turned a corner.

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? LONG LIFE HOLDING's earnings per share have shrunk at 13% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and LONG LIFE HOLDING's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that LONG LIFE HOLDING's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. LONG LIFE HOLDING has a low payout ratio, which we like, although it paid out virtually all of its generated cash. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. Overall, LONG LIFE HOLDING 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.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Just as an example, we've come accross 5 warning signs for LONG LIFE HOLDING you should be aware of, and 2 of them are potentially serious.

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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