Is Tohoku Steel Co., Ltd. (TYO:5484) An Attractive Dividend Stock?

Today we'll take a closer look at Tohoku Steel Co., Ltd. (TYO:5484) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. 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 0.9% yield is nothing to get excited about, but investors probably think the long payment history suggests Tohoku Steel has some staying power. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

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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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Tohoku Steel paid out 14% of its profit as dividends. With a low payout ratio, it looks like the dividend is comprehensively covered by earnings.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Tohoku Steel's cash payout ratio last year was 17%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It's positive to see that Tohoku Steel's 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, Tohoku Steel investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on Tohoku Steel's 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 Tohoku Steel'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¥12.0 in 2010, compared to JP¥14.0 last year. This works out to be a compound annual growth rate (CAGR) of approximately 1.6% 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.

We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments, we don't think this is an attractive combination.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Tohoku Steel has grown its earnings per share at 5.6% per annum over the past five years. With a decent amount of growth and a low payout ratio, we think this bodes well for Tohoku Steel's prospects of growing its dividend payments in the future.

Conclusion

To summarise, shareholders should always check that Tohoku Steel's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. It's great to see that Tohoku Steel is paying out a low percentage of its earnings and cash flow. Unfortunately, earnings growth has also been mediocre, and the company has cut its dividend at least once in the past. Tohoku Steel has a number of positive attributes, but it falls slightly short of our (admittedly high) standards. Were there evidence of a strong moat or an attractive valuation, it could still be well worth a look.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Tohoku Steel stock.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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