Towa Pharmaceutical (TSE:4553) Will Pay A Dividend Of ¥40.00

Towa Pharmaceutical Co., Ltd.'s (TSE:4553) investors are due to receive a payment of ¥40.00 per share on 2nd of December. This takes the annual payment to 2.6% of the current stock price, which is about average for the industry.

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Towa Pharmaceutical's Future Dividend Projections Appear Well Covered By Earnings

Solid dividend yields are great, but they only really help us if the payment is sustainable. Based on the last payment, Towa Pharmaceutical was paying only paying out a fraction of earnings, but the payment was a massive 315% of cash flows. 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 6.5%. Assuming the dividend continues along recent trends, we think the payout ratio could be 25% by next year, which is in a pretty sustainable range.

See our latest analysis for Towa Pharmaceutical

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The annual payment during the last 10 years was ¥25.00 in 2015, and the most recent fiscal year payment was ¥80.00. This works out to be a compound annual growth rate (CAGR) of approximately 12% a year over that time. Towa Pharmaceutical 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.

Towa Pharmaceutical May Find It Hard To Grow The Dividend

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. Earnings has been rising at 2.6% per annum over the last five years, which admittedly is a bit slow. While growth may be thin on the ground, Towa Pharmaceutical could always pay out a higher proportion of earnings to increase shareholder returns.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We would be a touch cautious of relying on this stock primarily for the dividend income.

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. To that end, Towa Pharmaceutical has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about. Is Towa Pharmaceutical 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.