Denka (TSE:4061) Has Announced A Dividend Of ¥50.00

Denka Company Limited (TSE:4061) will pay a dividend of ¥50.00 on the 3rd of December. This makes the dividend yield 4.8%, which will augment investor returns quite nicely.

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Denka Might Find It Hard To Continue The Dividend

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Denka's dividend was making up a very large proportion of earnings, and the company was also not generating any cash flow to offset this. This is a pretty unsustainable practice, and could be risky if continued for the long term.

Analysts expect the EPS to grow by 67.9% over the next 12 months. While it is good to see income moving in the right direction, it still looks like the company won't achieve profitability. Unless this can be done in short order, the dividend might be difficult to sustain.

See our latest analysis for Denka

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2015, the dividend has gone from ¥50.00 total annually to ¥100.00. This implies that the company grew its distributions at a yearly rate of about 7.2% over that duration. We like to see dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.

Dividend Growth Potential Is Shaky

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Denka's earnings per share has shrunk at 29% a year over the past five years. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

Denka's 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. While Denka is earning enough to cover the payments, the cash flows are lacking. We would probably look elsewhere for an income investment.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Denka has 2 warning signs (and 1 which is potentially serious) we think you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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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.