Read This Before Buying Sinmag Equipment Corporation (GTSM:1580) For Its Dividend

Is Sinmag Equipment Corporation (GTSM:1580) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.

In this case, Sinmag Equipment likely looks attractive to investors, given its 6.0% dividend yield and a payment history of over ten years. We'd guess that plenty of investors have purchased it for the income. Remember though, due to the recent spike in its share price, Sinmag Equipment's yield will look lower, even though the market may now be factoring in an improvement in its long-term prospects. Some simple analysis can reduce the risk of holding Sinmag Equipment for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Sinmag Equipment!

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 100% of Sinmag Equipment's profits were paid out as dividends in the last 12 months. With a payout ratio this high, we'd say its dividend is not well covered by earnings. This may be fine if earnings are growing, but it might not take much of a downturn for the dividend to come under pressure.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. The company paid out 57% of its free cash flow, which is not bad per se, but does start to limit the amount of cash Sinmag Equipment has available to meet other needs. It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Sinmag Equipment fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

While the above analysis focuses on dividends relative to a company's earnings, we do note Sinmag Equipment's strong net cash position, which will let it pay larger dividends for a time, should it choose.

Consider getting our latest analysis on Sinmag Equipment's financial position here.

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. Sinmag Equipment 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$4.0 in 2011, compared to NT$6.8 last year. This works out to be a compound annual growth rate (CAGR) of approximately 5.3% a year over that time. Sinmag Equipment's dividend payments have fluctuated, so it hasn't grown 5.3% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Sinmag Equipment might have put its house in order since then, but we remain cautious.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It's not great to see that Sinmag Equipment's have fallen at approximately 6.3% over the past five years. A modest decline in earnings per share is not great to see, but it doesn't automatically make a dividend unsustainable. Still, we'd vastly prefer to see EPS growth when researching dividend stocks.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We're a bit uncomfortable with its high payout ratio, although at least the dividend was covered by free cash flow. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. There are a few too many issues for us to get comfortable with Sinmag Equipment from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 2 warning signs for Sinmag Equipment (of which 1 is potentially serious!) you should know about.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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