Japan Tobacco (TSE:2914) Will Pay A Larger Dividend Than Last Year At ¥130.00
Japan Tobacco Inc.'s (TSE:2914) dividend will be increasing from last year's payment of the same period to ¥130.00 on 27th of March. Although the dividend is now higher, the yield is only 4.5%, which is below the industry average.
Japan Tobacco's Payment Could Potentially Have Solid Earnings Coverage
While yield is important, another factor to consider about a company's dividend is whether the current payout levels are feasible. The last payment was quite easily covered by earnings, but it made up 124% of cash flows. While the company may be more focused on returning cash to shareholders than growing the business at this time, we think that a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.
Looking forward, earnings per share is forecast to rise by 9.1% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 74%, which is in the range that makes us comfortable with the sustainability of the dividend.
See our latest analysis for Japan Tobacco
Dividend Volatility
Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from an annual total of ¥108.00 in 2015 to the most recent total annual payment of ¥260.00. This means that it has been growing its distributions at 9.2% per annum over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Japan Tobacco might have put its house in order since then, but we remain cautious.
The Dividend Looks Likely To Grow
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Japan Tobacco has seen EPS rising for the last five years, at 13% per annum. The company is paying out a lot of its cash as a dividend, but it looks okay based on the payout ratio.
In Summary
In summary, while it's always good to see the dividend being raised, we don't think Japan Tobacco's payments are rock solid. While Japan Tobacco is earning enough to cover the payments, the cash flows are lacking. We would probably look elsewhere for an income investment.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 1 warning sign for Japan Tobacco that you should be aware of before investing. Is Japan Tobacco not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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