With a dividend yield that now approaches six percent, Japanese conglomerate and holding company SoftBank (OTC: SOBKY) is on investors’ radar as an income-generating asset. As with any high-yield dividend stock, though, it’s important to ask the right questions before buying shares in SoftBank. Here’s what you need to know about SoftBank and whether its high dividend yield is the bargain it appears to be on the surface.
Pros of SoftBank
SoftBank’s dividend is very enticing. Only a small handful of S&P 500 stocks boast dividend yields that match or exceed the one currently offered by SoftBank. Given that rising stock prices have pushed dividend yields close to historic lows, SoftBank stands out as a naturally appealing choice for investors seeking more income from their capital.
SoftBank also has the advantage of occasionally posting very large profits from its Vision Fund, a fund that invests principally in technology startups. In May 2021, for example, SoftBank posted a profit of over $45 billion, the largest ever reported by a Japanese company. The vast majority of that profit stemmed from Vision Fund investments in South Korean eCommerce platform Coupang. The Vision Fund also owns substantial stakes in other burgeoning tech companies, including Uber and DoorDash.
On the downside, SoftBank has a concerning and inconsistent history of success with its Vision Fund investments. Office space sharing startup WeWork is, by far and away, the company’s most high-profile failure.
Following a series of excessively high valuations in the lead-up to its eventually scrapped IPO, WeWork effectively collapsed and left SoftBank with an $18.5 billion stake in a deeply distressed asset. Other notable misses for SoftBank include on-demand dog walking app Wag, eCommerce platform Brandless and an ill-fated robotic pizza-making startup called Zume Pizza.
SoftBank has also struggled to produce sizeable gains for investors, particularly following substantial losses at the outset of the COVID-19 pandemic. In November 2021, the company announced a stock buyback program aimed at propping up share prices. At the time, the company’s shares traded at a 52-percent discount when compared to the overall value of the assets it held.
Is the SoftBank Dividend Safe?
Since SoftBank’s dividend is arguably its largest selling point for investors, it’s important to determine how safe that dividend payment is. Until quite recently, SoftBank had an unblemished history of paying dividends that extended back to 1994. Following the dramatic losses from the Vision Fund in 2020, however, the future of the company’s dividends was thrown into doubt. Dividend guidance was suspended until March of 2021, rattling investors who had previously helped the company’s stock for its historically high and safe yields.
SoftBank’s debts are likely to weigh heavily on its ability to maintain its dividend going forward. Even before the market volatility of 2020, SoftBank appeared to be overburdened with debt as several of its assets lost value. Today, the company’s debt exceeds its total equity by a factor greater than 2. This ratio makes the company’s debts a significant liability that may interfere with its future dividends.
SoftBank’s dividend also appears to have little room left to grow. In the past decade, the company has raised its dividend only twice. Future dividend growth is currently projected at just 1.18 percent. Given that the long-term historical dividend growth rate for stocks in the S&P 500 index is approximately five percent, this slow rate of growth appears to be a significant liability. Taking into account inflation that is now running at 30-year highs, the future growth of SoftBank’s dividend will likely be eroded by rising prices.
With that said, the news isn’t all bad for SoftBank and its dividends. As noted earlier, the company posted a record profit for a Japanese company earlier last year. The Vision Fund’s inconsistency does raise the possibility that this is a temporary spike. If the company continues to post high profits and uses those profits to reduce its debt ratio, though, the dividend could become more secure than it currently looks.
SoftBank’s dividend payout ratio is also reasonably favorable. At 42.74 percent, this ratio falls in a safe range that doesn’t indicate undue pressure from making dividend payments.
Is the High Dividend Worth the Risk?
While a dividend as strong as SoftBank’s is understandably attractive, it also appears that the company is in a period of high volatility. Given its history of heavy losses, debt load and limited potential for future dividend growth, SoftBank’s dividend doesn’t appear to be a great bargain.
Investors seeking income from dividend-paying stocks will likely be able to find safer options elsewhere, particularly as dividend payouts return to pre-pandemic levels. Although the news certainly isn’t all bad, SoftBank’s recent history likely makes it too volatile for investors searching for stable, secure dividend income.