Nakayama Steel Works (TSE:5408) Will Pay A Smaller Dividend Than Last Year

Nakayama Steel Works, Ltd. (TSE:5408) has announced that on 29th of June, it will be paying a dividend of¥5.00, which a reduction from last year's comparable dividend. This means that the annual payment is 2.2% of the current stock price, which is lower than what the rest of the industry is paying.

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Nakayama Steel Works' Projected Earnings Seem Likely To Cover Future Distributions

The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. However, prior to this announcement, Nakayama Steel Works' dividend was comfortably covered by both cash flow and earnings. As a result, a large proportion of what it earned was being reinvested back into the business.

If the trend of the last few years continues, EPS will grow by 19.6% over the next 12 months. If the dividend continues on this path, the payout ratio could be 18% by next year, which we think can be pretty sustainable going forward.

See our latest analysis for Nakayama Steel Works

Nakayama Steel Works' Dividend Has Lacked Consistency

Even in its relatively short history, the company has reduced the dividend at least once. This suggests that the dividend might not be the most reliable. The annual payment during the last 9 years was ¥5.00 in 2016, and the most recent fiscal year payment was ¥13.00. This means that it has been growing its distributions at 11% 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. It's encouraging to see that Nakayama Steel Works has been growing its earnings per share at 20% a 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.

We Really Like Nakayama Steel Works' Dividend

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 of these factors considered, we think this has solid potential as a dividend stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 2 warning signs 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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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.