Are Dividend Investors Making A Mistake With Lung Pien Vacuum Industry Co., Ltd. (GTSM:5267)?

Could Lung Pien Vacuum Industry Co., Ltd. (GTSM:5267) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

In this case, Lung Pien Vacuum Industry likely looks attractive to dividend investors, given its 5.8% dividend yield and eight-year payment history. We'd agree the yield does look enticing. There are a few simple ways to reduce the risks of buying Lung Pien Vacuum Industry for its dividend, and we'll go through these below.

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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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, Lung Pien Vacuum Industry paid out 118% of its profit as dividends. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. With a cash payout ratio of 1,544%, Lung Pien Vacuum Industry's dividend payments are poorly covered by cash flow. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term. Cash is slightly more important than profit from a dividend perspective, but given Lung Pien Vacuum Industry's payouts were not well covered by either earnings or cash flow, we would definitely be concerned about the sustainability of this dividend.

With a strong net cash balance, Lung Pien Vacuum Industry investors may not have much to worry about in the near term from a dividend perspective.

We update our data on Lung Pien Vacuum Industry every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. The first recorded dividend for Lung Pien Vacuum Industry, in the last decade, was eight years ago. It's good to see that Lung Pien Vacuum Industry has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past eight-year period, the first annual payment was NT$3.5 in 2013, compared to NT$2.0 last year. The dividend has shrunk at around 6.8% a year during that period. Lung Pien Vacuum Industry's dividend hasn't shrunk linearly at 6.8% per annum, but the CAGR is a useful estimate of the historical rate of change.

A shrinking dividend over a eight-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

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Over the past five years, it looks as though Lung Pien Vacuum Industry's EPS have declined at around 8.1% a year. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company's dividend.

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 Lung Pien Vacuum Industry paying out a high percentage of both its cashflow and earnings. Earnings per share are down, and Lung Pien Vacuum Industry's dividend has been cut at least once in the past, which is disappointing. There are a few too many issues for us to get comfortable with Lung Pien Vacuum Industry from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 6 warning signs for Lung Pien Vacuum Industry (2 are concerning!) that you should be aware of before investing.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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