SMFG: A 6.6% Yield That May Be Safer Than It Appears

Earlier in the year, I recommended the Sumitomo Mitsui Financial Group (NYSE: SMFG) in my newsletter.

This was before COVID-19 made its appearance in the U.S. I liked Japan’s prospects for economic recovery and Sumitomo Mitsui’s position as the fourth-largest financial institution in Japan (although it generates 30% of its revenue from 39 other countries).

The company is also one of the technology leaders in the cashless society movement, which is something the Japanese government is strongly in favor of.

Now that the stock has fallen due to the global economic shutdown, I believe it’s a screaming bargain. And while investors wait for the stock to rebound, they get paid a 6.6% dividend yield. But is that dividend safe?

Net interest income (NII), which is the difference between how much interest a financial institution collects from lending money and how much it pays to depositors, is a key metric in analyzing its dividend.

Sumitomo Mitsui Financial Group’s NII declined last year and over the past three years, but barely. In 2016, the bank brought in 1.42 trillion yen. NII declined slightly the following year, rose a tiny bit in 2018 and declined again slightly in 2019.

Chart - Sumitomo Mitsui Financial Group's Net Interest Income

While we certainly want to see NII move higher, this hasn’t exactly been a collapse.

Here’s why I’m not too worried…

Sumitomo Mitsui Financial Group pays out only 18% of its NII in dividends. That is a very wide buffer in case things get difficult. Additionally, the company has not cut the dividend in at least the past 10 years. Instead, it has raised it five times.

Right now, we are in extraordinary times. The economic shutdown is wreaking havoc across a wide variety of industries and businesses.

But considering Sumitomo Mitsui Financial Group’s extremely low payout ratio, I suspect the dividend is safer than its low rating. In fact, if there were not a worldwide crisis going on, I’d go as far as to say there is no way it will cut its dividend.

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