Is Meiko Electronics Co., Ltd. (TYO:6787) An Attractive Dividend Stock?

Is Meiko Electronics Co., Ltd. (TYO:6787) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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 0.8% yield is nothing to get excited about, but investors probably think the long payment history suggests Meiko Electronics has some staying power. That said, the recent jump in the share price will make Meiko Electronics's dividend yield look smaller, even though the company prospects could be improving. Some simple research can reduce the risk of buying Meiko Electronics for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Meiko Electronics!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Although Meiko Electronics pays a dividend, it was loss-making during the past year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

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

Consider getting our latest analysis on Meiko Electronics' financial position here.

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. Meiko Electronics has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was JP¥24.0 in 2011, compared to JP¥20.0 last year. This works out to be a decline of approximately 1.8% per year over that time. Meiko Electronics' dividend hasn't shrunk linearly at 1.8% per annum, but the CAGR is a useful estimate of the historical rate of change.

We struggle to make a case for buying Meiko Electronics for its dividend, given that payments have shrunk over the past 10 years.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. It's good to see Meiko Electronics has been growing its earnings per share at 48% a year over the past five years.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We're a bit uncomfortable with Meiko Electronics paying a dividend while loss-making, especially since the dividend was also not well covered by free cash flow. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. In summary, Meiko Electronics has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 1 warning sign for Meiko Electronics that investors need to be conscious of moving forward.

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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