Menicon Co., Ltd. (TSE:7780) will increase its dividend from last year's comparable payment on the 27th of June to ¥28.00. This will take the annual payment to 1.9% of the stock price, which is above what most companies in the industry pay.
View our latest analysis for Menicon
Menicon's Payment Could Potentially Have Solid Earnings Coverage
If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, Menicon's earnings easily covered the dividend, but free cash flows were negative. With the company not bringing in any cash, paying out to shareholders is bound to become difficult at some point.
The next year is set to see EPS grow by 19.2%. If the dividend continues along recent trends, we estimate the payout ratio will be 42%, which is in the range that makes us comfortable with the sustainability of the dividend.
Menicon Doesn't Have A Long Payment History
It is great to see that Menicon has been paying a stable dividend for a number of years now, however we want to be a bit cautious about whether this will remain true through a full economic cycle. The annual payment during the last 9 years was ¥8.00 in 2015, and the most recent fiscal year payment was ¥28.00. This works out to be a compound annual growth rate (CAGR) of approximately 15% a year over that time. It is always nice to see strong dividend growth, but with such a short payment history we wouldn't be inclined to rely on it until a longer track record can be developed.
Menicon May Find It Hard To Grow The Dividend
Investors could be attracted to the stock based on the quality of its payment history. However, things aren't all that rosy. Although it's important to note that Menicon's earnings per share has basically not grown from where it was five years ago, which could erode the purchasing power of the dividend over time.
Menicon's Dividend Doesn't Look Sustainable
Overall, we always like to see the dividend being raised, but we don't think Menicon will make a great income stock. While Menicon is earning enough to cover the payments, the cash flows are lacking. We don't think Menicon is a great stock to add to your portfolio if income is your focus.
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. For instance, we've picked out 1 warning sign for Menicon that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high yield 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.
About TSE:7780
Undervalued with adequate balance sheet.
