Should Systems Design Co., Ltd. (TYO:3766) Be Part Of Your Income Portfolio?

Could Systems Design Co., Ltd. (TYO:3766) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

A 2.2% yield is nothing to get excited about, but investors probably think the long payment history suggests Systems Design has some staying power. The company also returned around 2.8% of its market capitalisation to shareholders in the form of stock buybacks over the past year. Some simple research can reduce the risk of buying Systems Design for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Systems Design!

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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Although Systems Design pays a dividend, it was loss-making during the past year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Last year, Systems Design paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

With a strong net cash balance, Systems Design investors may not have much to worry about in the near term from a dividend perspective.

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

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Systems Design has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past 10-year period, the first annual payment was JP¥10.0 in 2011, compared to JP¥13.0 last year. Dividends per share have grown at approximately 2.7% per year over this time.

While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is unappealing.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Systems Design's EPS have fallen by approximately 45% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Systems Design's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Systems Design's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. It's a concern to see that the company paid a dividend despite reporting a loss, and the dividend was also not well covered by free cash flow. Second, earnings per share have actually shrunk, but at least the dividends have been relatively stable. Using these criteria, Systems Design looks quite suboptimal from a dividend investment perspective.

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. Just as an example, we've come accross 3 warning signs for Systems Design you should be aware of, and 1 of them doesn't sit too well with us.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 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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