Three Things You Should Check Before Buying Tokatsu Holdings Co., Ltd. (TYO:2754) For Its Dividend

Could Tokatsu Holdings Co., Ltd. (TYO:2754) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

A 2.4% yield is nothing to get excited about, but investors probably think the long payment history suggests Tokatsu Holdings has some staying power. Some simple analysis can reduce the risk of holding Tokatsu Holdings for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Tokatsu Holdings!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. In the last year, Tokatsu Holdings paid out 25% of its profit as dividends. We'd say its dividends are thoroughly covered by earnings.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. With a cash payout ratio of 98%, Tokatsu Holdings' dividend payments are poorly covered by cash flow. While Tokatsu Holdings' dividends were covered by the company's reported profits, free cash flow is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to Tokatsu Holdings' ability to maintain its dividend.

While the above analysis focuses on dividends relative to a company's earnings, we do note Tokatsu Holdings' strong net cash position, which will let it pay larger dividends for a time, should it choose.

Remember, you can always get a snapshot of Tokatsu Holdings' latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of Tokatsu Holdings' dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. Its most recent annual dividend was JP¥10.0 per share, effectively flat on its first payment 10 years ago.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. In the last five years, Tokatsu Holdings' earnings per share have shrunk at approximately 5.9% per annum. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. First, we like Tokatsu Holdings' low dividend payout ratio, although we're a bit concerned that it paid out a substantially higher percentage of its free cash flow. Moreover, earnings have been shrinking. While the dividends have been fairly steady, we'd wonder for how much longer this will be sustainable if earnings continue to decline. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Tokatsu Holdings out there.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Tokatsu Holdings has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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This article by Simply Wall St is general in nature. 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.
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