Japan Foods Holding Ltd. (Catalist:5OI) has announced it will be reducing its dividend payable on the 15th of December to SGD0.003, which is 70% lower than what investors received last year for the same period. However, the dividend yield of 5.6% is still a decent boost to shareholder returns.

See our latest analysis for Japan Foods Holding

Japan Foods Holding's Payment Has Solid Earnings Coverage

A big dividend yield for a few years doesn't mean much if it can't be sustained. Before making this announcement, Japan Foods Holding's dividend was higher than its profits, but the free cash flows quite comfortably covered it. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.

Over the next year, EPS is forecast to expand by 80.1%. If the dividend continues along recent trends, we estimate the payout ratio will be 69%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The annual payment during the last 10 years was SGD0.0133 in 2013, and the most recent fiscal year payment was SGD0.02. This works out to be a compound annual growth rate (CAGR) of approximately 4.2% a year over that time. We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments the total shareholder return may be limited.

The Dividend Has Limited Growth Potential

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Over the past five years, it looks as though Japan Foods Holding's EPS has declined at around 18% a year. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. Over the next year, however, earnings are actually predicted to rise, but we would still be cautious until a track record of earnings growth can be built.

Japan Foods Holding's Dividend Doesn't Look Sustainable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. We would probably look elsewhere for an income investment.