Nippon Gas' (TSE:8174) Upcoming Dividend Will Be Larger Than Last Year's

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 makes the dividend yield 3.9%, which is above the industry average.

View our latest analysis for Nippon Gas

Nippon Gas Is Paying Out More Than It Is Earning

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before this announcement, Nippon Gas was paying out 88% of earnings, but a comparatively small 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. If the dividend continues on its recent course, the payout ratio in 12 months could be 105%, which is a bit high and could start applying pressure to the balance sheet.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2014, the dividend has gone from ¥4.33 total annually to ¥92.50. This works out to be a compound annual growth rate (CAGR) of approximately 36% a year over that time. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.

Dividend Growth Could Be Constrained

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Nippon Gas has impressed us by growing EPS at 15% per year over the past five years. EPS has been growing at a reasonable rate, although with most of the profits being paid out to shareholders, growth prospects could be more limited in the future.

Our Thoughts On Nippon Gas' Dividend

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. Overall, we don't think this company has the makings of a good income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 1 warning sign for Nippon Gas that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high yield 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.