Nakayama Steel Works' (TSE:5408) Dividend Is Being Reduced To ¥18.00

Nakayama Steel Works, Ltd.'s (TSE:5408) dividend is being reduced from last year's payment covering the same period to ¥18.00 on the 2nd of December. This means the annual payment is 5.1% of the current stock price, which is above the average for the industry.

Check out our latest analysis for Nakayama Steel Works

Nakayama Steel Works' Payment Could Potentially Have Solid Earnings Coverage

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Based on the last payment, Nakayama Steel Works was paying only paying out a fraction of earnings, but the payment was a massive 161% of cash flows. While the business may be attempting to set a balanced dividend policy, a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.

Over the next year, EPS could expand by 19.1% if recent trends continue. If the dividend continues on this path, the payout ratio could be 39% by next year, which we think can be pretty sustainable going forward.

Nakayama Steel Works' Dividend Has Lacked Consistency

Nakayama Steel Works has been paying dividends for a while, but the track record isn't stellar. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. Since 2016, the annual payment back then was ¥5.00, compared to the most recent full-year payment of ¥40.00. This means that it has been growing its distributions at 30% per annum over that time. Nakayama Steel Works has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

The Dividend Looks Likely To Grow

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. Nakayama Steel Works has impressed us by growing EPS at 19% per year over the past five years. Growth in EPS bodes well for the dividend, as does the low payout ratio that the company is currently reporting.

In Summary

Overall, it's not great to see that the dividend has been cut, but this might be explained by the payments being a bit high previously. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We don't think Nakayama Steel Works is a great stock to add to your portfolio if income is your focus.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 1 warning sign for Nakayama Steel Works that investors need to be conscious of moving forward. Is Nakayama Steel Works not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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