Is Synclayer Inc. (TYO:1724) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Unfortunately, it’s common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
A 0.8% yield is nothing to get excited about, but investors probably think the long payment history suggests Synclayer has some staying power. That said, the recent jump in the share price will make Synclayer’s dividend yield look smaller, even though the company prospects could be improving. There are a few simple ways to reduce the risks of buying Synclayer for its dividend, and we’ll go through these below.
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Payout ratios
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 13% of Synclayer’s profits were paid out as dividends in the last 12 months. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.
Consider getting our latest analysis on Synclayer’s financial position here.
Dividend Volatility
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. Synclayer has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past ten-year period, the first annual payment was JP¥6.00 in 2010, compared to JP¥12.00 last year. Dividends per share have grown at approximately 7.2% per year over this time. The dividends haven’t grown at precisely 7.2% every year, but this is a useful way to average out the historical rate of growth.
A reasonable rate of dividend growth is good to see, but we’re wary that the dividend history is not as solid as we’d like, having been cut at least once.
Dividend Growth Potential
With a relatively unstable dividend, it’s even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there’s a good chance of bigger dividends in future? Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Synclayer has grown its earnings per share at 41% per annum over the past five years. The company is only paying out a fraction of its earnings as dividends, and in the past been able to use the retained earnings to grow its profits rapidly – an ideal combination.
Conclusion
To summarise, shareholders should always check that Synclayer’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that Synclayer has a low and conservative payout ratio. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. Overall we think Synclayer is an interesting dividend stock, although it could be better.
You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Synclayer stock.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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