Japan Tobacco's (TSE:2914) Upcoming Dividend Will Be Larger Than Last Year's

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. Even though the dividend went up, the yield is still quite low at only 4.5%.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

Japan Tobacco's Projected Earnings Seem Likely To Cover Future Distributions

If it is predictable over a long period, even low dividend yields can be attractive. Prior to this announcement, Japan Tobacco's dividend was only 67% of earnings, however it was paying out 124% of free 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.

Over the next year, EPS is forecast to expand by 10.2%. Assuming the dividend continues along recent trends, we think the payout ratio could be 73% by next year, which is in a pretty sustainable range.

View our latest analysis for Japan Tobacco

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The annual payment during the last 10 years was ¥108.00 in 2015, and the most recent fiscal year payment was ¥260.00. This works out to be a compound annual growth rate (CAGR) of approximately 9.2% a year 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

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Japan Tobacco has impressed us by growing EPS at 13% per year over the past five years. While on an earnings basis, this company looks appealing as an income stock, the cash payout ratio still makes us cautious.

Our Thoughts On Japan Tobacco's Dividend

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. This company is not in the top tier of income providing stocks.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 1 warning sign for Japan Tobacco that investors should take into consideration. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.