Showa Paxxs Corporation's (TYO:3954) Attractive Combination: Does It Earn A Place In Your Dividend Portfolio?

Could Showa Paxxs Corporation (TYO:3954) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the 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 2.1% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Showa Paxxs could have potential. There are a few simple ways to reduce the risks of buying Showa Paxxs for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Showa Paxxs!

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 17% of Showa Paxxs' profits were paid out as dividends in the last 12 months. We'd say its dividends are thoroughly covered by earnings.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Showa Paxxs' cash payout ratio last year was 15%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout. It's positive to see that Showa Paxxs' dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

With a strong net cash balance, Showa Paxxs investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on Showa Paxxs' financial position here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of Showa Paxxs' 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¥20.0 in 2011, compared to JP¥38.0 last year. This works out to be a compound annual growth rate (CAGR) of approximately 6.6% 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.

A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Earnings have grown at around 5.0% a year for the past five years, which is better than seeing them shrink! So, we know earnings growth has been thin on the ground. However, the payout ratio is low, and some companies can deliver adequate dividend performance simply by increasing the payout ratio.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. First, we like that the company's dividend payments appear well covered, although the retained capital also needs to be effectively reinvested. Second, earnings growth has been ordinary, and its history of dividend payments is chequered - having cut its dividend at least once in the past. Overall we think Showa Paxxs is an interesting dividend stock, although it could be better.

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. Taking the debate a bit further, we've identified 2 warning signs for Showa Paxxs that investors need to be conscious of moving forward.

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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