Nakayama Steel Works (TSE:5408) Will Pay A Dividend Of ¥22.00

Nakayama Steel Works, Ltd.'s (TSE:5408) investors are due to receive a payment of ¥22.00 per share on 27th of June. This means the annual payment is 6.7% 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' Projected Earnings Seem Likely To Cover Future Distributions

A big dividend yield for a few years doesn't mean much if it can't be sustained. Before making this announcement, Nakayama Steel Works was paying a whopping 156% as a dividend, but this only made up 22% of its overall earnings. The business might be trying to strike a balance between returning cash to shareholders and reinvesting back into the business, but this high of a payout ratio could definitely force the dividend to be cut if the company runs into a bit of a tough spot.

Looking forward, earnings per share could rise by 15.6% over the next year if the trend from the last few years continues. If the dividend continues along recent trends, we estimate the payout ratio will be 32%, which is in the range that makes us comfortable with the sustainability of the dividend.

Nakayama Steel Works' Dividend Has Lacked Consistency

Nakayama Steel Works has been paying dividends for a while, but the track record isn't stellar. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. The annual payment during the last 8 years was ¥5.00 in 2016, and the most recent fiscal year payment was ¥49.00. This works out to be a compound annual growth rate (CAGR) of approximately 33% a year over that time. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.

The Dividend Looks Likely To Grow

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. We are encouraged to see that Nakayama Steel Works has grown earnings per share at 16% 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.

Our Thoughts On Nakayama Steel Works' Dividend

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. Overall, we don't think this company has the makings of a good income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 1 warning sign for Nakayama Steel Works that investors should take into consideration. 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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