KH Neochem (TSE:4189) Will Pay A Larger Dividend Than Last Year At ¥52.50

KH Neochem Co., Ltd. (TSE:4189) will increase its dividend from last year's comparable payment on the 8th of September to ¥52.50. This makes the dividend yield 4.2%, which is above the industry average.

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KH Neochem's Payment Could Potentially Have Solid Earnings Coverage

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Prior to this announcement, KH Neochem's earnings easily covered the dividend, but free cash flows were negative. With the company not bringing in any cash, paying out to shareholders is bound to become difficult at some point.

Over the next year, EPS is forecast to expand by 16.3%. Assuming the dividend continues along recent trends, we think the payout ratio could be 39% by next year, which is in a pretty sustainable range.

See our latest analysis for KH Neochem

KH Neochem Is Still Building Its Track Record

It is great to see that KH Neochem has been paying a stable dividend for a number of years now, however we want to be a bit cautious about whether this will remain true through a full economic cycle. Since 2016, the annual payment back then was ¥46.50, compared to the most recent full-year payment of ¥105.00. This means that it has been growing its distributions at 9.5% per annum over that time. Investors will likely want to see a longer track record of growth before making decision to add this to their income portfolio.

KH Neochem Could Grow Its Dividend

Investors could be attracted to the stock based on the quality of its payment history. We are encouraged to see that KH Neochem has grown earnings per share at 7.2% per year over the past five years. A low payout ratio and decent growth suggests that the company is reinvesting well, and it also has plenty of room to increase the dividend over time.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. 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. As an example, we've identified 1 warning sign for KH Neochem that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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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.