Nakayama Steel Works' (TSE:5408) Dividend Is Being Reduced To ¥8.00

Nakayama Steel Works, Ltd. (TSE:5408) is reducing its dividend from last year's comparable payment to ¥8.00 on the 2nd of December. This means that the annual payment will be 3.9% of the current stock price, which is in line with the average for the industry.

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Nakayama Steel Works' Payment Could Potentially Have Solid Earnings Coverage

We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. However, Nakayama Steel Works' earnings easily cover the dividend. This means that most of what the business earns is being used to help it grow.

If the trend of the last few years continues, EPS will grow by 14.3% over the next 12 months. Assuming the dividend continues along recent trends, we think the payout ratio could be 33% by next year, which is in a pretty sustainable range.

View our latest analysis for Nakayama Steel Works

Nakayama Steel Works' Dividend Has Lacked Consistency

It's comforting to see that Nakayama Steel Works has been paying a dividend for a number of years now, however it has been cut at least once in that time. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. The dividend has gone from an annual total of ¥5.00 in 2017 to the most recent total annual payment of ¥24.00. This means that it has been growing its distributions at 22% 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

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. Nakayama Steel Works has impressed us by growing EPS at 14% per year over the past five years. Nakayama Steel Works definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.

Nakayama Steel Works Looks Like A Great Dividend Stock

In general, we don't like to see the dividend being cut, especially when the company has such high potential like Nakayama Steel Works does. The cut will allow the company to continue paying out the dividend without putting the balance sheet under pressure, which means that it could remain sustainable for longer. All in all, this checks a lot of the boxes we look for when choosing an income stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 2 warning signs 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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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.