Key Things To Consider Before Buying Depo Auto Parts Industrial Co., Ltd. (TPE:6605) For Its Dividend

Today we'll take a closer look at Depo Auto Parts Industrial Co., Ltd. (TPE:6605) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

A 2.4% yield is nothing to get excited about, but investors probably think the long payment history suggests Depo Auto Parts Industrial has some staying power. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

Click the interactive chart for our full dividend analysis

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Depo Auto Parts Industrial paid out 42% of its profit as dividends. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Depo Auto Parts Industrial paid out 13% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable. It's positive to see that Depo Auto Parts Industrial's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Remember, you can always get a snapshot of Depo Auto Parts Industrial's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Depo Auto Parts Industrial has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was NT$3.8 in 2011, compared to NT$1.5 last year. This works out to be a decline of approximately 8.9% per year over that time. Depo Auto Parts Industrial's dividend has been cut sharply at least once, so it hasn't fallen by 8.9% every year, but this is a decent approximation of the long term change.

A shrinking dividend over a 10-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Depo Auto Parts Industrial's earnings per share have shrunk at 18% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Depo Auto Parts Industrial's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Depo Auto Parts Industrial's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that Depo Auto Parts Industrial has low and conservative payout ratios. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In sum, we find it hard to get excited about Depo Auto Parts Industrial from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Case in point: We've spotted 3 warning signs for Depo Auto Parts Industrial (of which 1 is a bit unpleasant!) you should know about.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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This article by Simply Wall St is general in nature. 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.
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