Toray Industries, Inc.'s (TSE:3402) investors are due to receive a payment of ¥9.00 per share on 2nd of December. This payment means that the dividend yield will be 2.4%, which is around the industry average.
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Toray Industries Doesn't Earn Enough To Cover Its Payments
Solid dividend yields are great, but they only really help us if the payment is sustainable. Before making this announcement, Toray Industries' dividend was higher than its profits, but the free cash flows quite comfortably covered it. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.
Earnings per share is forecast to rise by 26.5% over the next year. However, if the dividend continues along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 109% over the next year.
Dividend Volatility
Although the company has a long dividend history, it has been cut at least once in the last 10 years. The annual payment during the last 10 years was ¥10.00 in 2014, and the most recent fiscal year payment was ¥18.00. This means that it has been growing its distributions at 6.1% per annum over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Toray Industries might have put its house in order since then, but we remain cautious.
Dividend Growth Potential Is Shaky
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 per share has been sinking by 23% over the last five years. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. On the bright side, earnings are predicted to gain some ground over the next year, but until this turns into a pattern we wouldn't be feeling too comfortable.
Toray Industries' Dividend Doesn't Look Sustainable
Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. This company is not in the top tier of income providing stocks.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 3 warning signs for Toray Industries that investors should take into consideration. Is Toray Industries not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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About TSE:3402
Toray Industries
Manufactures, processes, and sells fibers and textiles, performance chemicals, carbon fiber composite materials, environment and engineering products, and life science products in Japan, China, North America, Europe, and internationally.
Flawless balance sheet with reasonable growth potential.