ARE Holdings, Inc. (TSE:5857) will pay a dividend of ¥40.00 on the 4th of June. The dividend yield of 4.7% is still a nice boost to shareholder returns, despite the cut.
View our latest analysis for ARE Holdings
ARE Holdings' Payment Could Potentially Have Solid Earnings Coverage
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, ARE Holdings was paying a whopping 161% as a dividend, but this only made up 35% of its overall earnings. 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 is forecast to expand by 13.8%. If the dividend continues along recent trends, we estimate the payout ratio will be 62%, which is in the range that makes us comfortable with the sustainability of the dividend.
Dividend Volatility
Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2014, the dividend has gone from ¥30.00 total annually to ¥80.00. This means that it has been growing its distributions at 10% per annum over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.
ARE Holdings May Find It Hard To Grow The Dividend
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Earnings have grown at around 3.2% a year for the past five years, which isn't massive but still better than seeing them shrink. If ARE Holdings is struggling to find viable investments, it always has the option to increase its payout ratio to pay more to shareholders.
In Summary
In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. While ARE Holdings is earning enough to cover the payments, the cash flows are lacking. We don't think ARE Holdings 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. For example, we've identified 2 warning signs for ARE Holdings (1 can't be ignored!) that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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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.
About TSE:5857
ARE Holdings
Engages in recycling and selling precious and rare metals in Japan, rest of Asia, and North America.
Adequate balance sheet average dividend payer.
