Nippon Gas (TSE:8174) Is Paying Out A Larger Dividend Than Last Year

Nippon Gas Co., Ltd. (TSE:8174) will increase its dividend from last year's comparable payment on the 18th of November to ¥46.25. This will take the annual payment to 4.1% of the stock price, which is above what most companies in the industry pay.

See our latest analysis for Nippon Gas

Nippon Gas Doesn't Earn Enough To Cover Its Payments

If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, Nippon Gas' dividend made up quite a large proportion of earnings but only 75% of free cash flows. This leaves plenty of cash for reinvestment into the business.

Earnings per share is forecast to rise by 12.5% over the next year. However, if the dividend continues along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 105% over the next year.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2014, the annual payment back then was ¥4.33, compared to the most recent full-year payment of ¥92.50. This implies that the company grew its distributions at a yearly rate of about 36% over that duration. Nippon Gas 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.

Nippon Gas Might Find It Hard To Grow Its Dividend

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. It's encouraging to see that Nippon Gas has been growing its earnings per share at 15% a year over the past five years. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Nippon Gas' payments are rock solid. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would probably look elsewhere for an income investment.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 1 warning sign for Nippon Gas that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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