Hwa Fong Rubber Industrial's (TWSE:2109) Shareholders Will Receive A Bigger Dividend Than Last Year

Hwa Fong Rubber Industrial Co., Ltd. (TWSE:2109) has announced that it will be increasing its dividend from last year's comparable payment on the 20th of May to NT$0.80. This makes the dividend yield 6.9%, which is above the industry average.

See our latest analysis for Hwa Fong Rubber Industrial

Hwa Fong Rubber Industrial's Earnings Easily Cover The Distributions

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Prior to this announcement, Hwa Fong Rubber Industrial was paying out 79% of earnings and more than 75% of free cash flows. This is usually an indication that the focus of the company is returning cash to shareholders rather than reinvesting it for growth.

If the trend of the last few years continues, EPS will grow by 41.4% over the next 12 months. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 61% which would be quite comfortable going to take the dividend forward.

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 NT$0.327 in 2014, and the most recent fiscal year payment was NT$1.20. This implies that the company grew its distributions at a yearly rate of about 14% over that duration. Hwa Fong Rubber Industrial has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

Hwa Fong Rubber Industrial Might Find It Hard To Grow Its Dividend

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. We are encouraged to see that Hwa Fong Rubber Industrial has grown earnings per share at 41% per year over the past five years. However, Hwa Fong Rubber Industrial isn't reinvesting a lot back into the business, so we wonder how quickly it will be able to grow in the future.

Our Thoughts On Hwa Fong Rubber Industrial's Dividend

Overall, we always like to see the dividend being raised, but we don't think Hwa Fong Rubber Industrial will make a great income stock. In general, the distributions are a little bit higher than we would like, but we can't ignore the fact the quickly growing earnings gives this stock great potential in the future. Overall, we don't think this company has the makings of a good income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 2 warning signs for Hwa Fong Rubber Industrial that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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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.