Yodogawa Steel Works (TSE:5451) Is Paying Out A Larger Dividend Than Last Year

Yodogawa Steel Works, Ltd. (TSE:5451) has announced that it will be increasing its dividend from last year's comparable payment on the 26th of June to ¥233.00. This will take the dividend yield to an attractive 5.6%, providing a nice boost to shareholder returns.

See our latest analysis for Yodogawa Steel Works

Yodogawa Steel Works' Future Dividends May Potentially Be At Risk

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Yodogawa Steel Works' dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 101% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.

Earnings per share could rise by 8.6% over the next year if things go the same way as they have for the last few years. Assuming the dividend continues along recent trends, we think the payout ratio could reach 125%, which probably can't continue without starting to put some pressure on the balance sheet.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The dividend has gone from an annual total of ¥50.00 in 2015 to the most recent total annual payment of ¥333.00. This works out to be a compound annual growth rate (CAGR) of approximately 21% a year over that time. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.

The Dividend Has Growth Potential

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. Yodogawa Steel Works has seen EPS rising for the last five years, at 8.6% per annum. The payout ratio is very much on the higher end, which could mean that the growth rate will slow down in the future, and that could flow through to the dividend as well.

The Dividend Could Prove To Be Unreliable

Overall, we always like to see the dividend being raised, but we don't think Yodogawa Steel Works will make a great income stock. Strong earnings growth means Yodogawa Steel Works has the potential to be a good dividend stock in the future, despite the current payments being at elevated levels. This company is not in the top tier of income providing stocks.

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 2 warning signs for Yodogawa Steel Works that you should be aware of before investing. Is Yodogawa 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.