Here's How We Evaluate Itec Corporation's (TYO:9964) Dividend

Is Itec Corporation (TYO:9964) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.

While Itec's 1.9% dividend yield is not the highest, we think its lengthy payment history is quite interesting. During the year, the company also conducted a buyback equivalent to around 24% of its market capitalisation. Some simple analysis can reduce the risk of holding Itec for its dividend, and we'll focus on the most important aspects below.

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. Itec paid out 50% of its profit as dividends, over the trailing twelve month period. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Itec paid out 7.6% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable. It's positive to see that Itec'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.

Remember, you can always get a snapshot of Itec'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. Itec has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was JP¥35.0 in 2011, compared to JP¥30.0 last year. This works out to be a decline of approximately 1.5% per year over that time. Itec's dividend hasn't shrunk linearly at 1.5% per annum, but the CAGR is a useful estimate of the historical rate of change.

A shrinking dividend over a 10-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

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. Over the past five years, it looks as though Itec's EPS have declined at around 19% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Itec's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Itec's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that Itec has low and conservative payout ratios. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In sum, we find it hard to get excited about Itec from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Case in point: We've spotted 4 warning signs for Itec (of which 1 makes us a bit uncomfortable!) you should know about.

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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