Sumco (TSE:3436) Is Paying Out Less In Dividends Than Last Year

Sumco Corporation (TSE:3436) has announced it will be reducing its dividend payable on the 5th of September to ¥10.00, which is 76% lower than what investors received last year for the same period. The dividend yield of 2.3% is still a nice boost to shareholder returns, despite the cut.

View our latest analysis for Sumco

Sumco's Dividend Is Well Covered By Earnings

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, Sumco's earnings easily covered the dividend, but free cash flows were negative. Since a dividend means the company is paying out cash to investors, this could prove to be a problem in the future.

Over the next year, EPS is forecast to expand by 137.8%. If the dividend continues along recent trends, we estimate the payout ratio will be 13%, which is in the range that makes us comfortable with the sustainability of the dividend.

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. Since 2014, the annual payment back then was ¥1.00, compared to the most recent full-year payment of ¥55.00. This works out to be a compound annual growth rate (CAGR) of approximately 49% a year over that time. Sumco 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 Has Limited Growth Potential

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. Earnings per share has been sinking by 15% over the last five years. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this becomes a long term trend.

Sumco's Dividend Doesn't Look Sustainable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. While Sumco is earning enough to cover the payments, the cash flows are lacking. We don't think Sumco is a great stock to add to your portfolio if income is your focus.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 2 warning signs for Sumco that investors need to be conscious of moving forward. Is Sumco 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.

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