Here's How We Evaluate StrongLED Lighting Systems (Cayman) Co., Ltd.'s (GTSM:5281) Dividend

Today we'll take a closer look at StrongLED Lighting Systems (Cayman) Co., Ltd. (GTSM:5281) 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. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

Investors might not know much about StrongLED Lighting Systems (Cayman)'s dividend prospects, even though it has been paying dividends for the last four years and offers a 2.2% yield. A 2.2% yield is not inspiring, but the longer payment history has some appeal. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Explore this interactive chart for our latest analysis on StrongLED Lighting Systems (Cayman)!

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. 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, StrongLED Lighting Systems (Cayman) paid out 31% of its profit as dividends. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. StrongLED Lighting Systems (Cayman) paid out 4.8% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable. It's positive to see that StrongLED Lighting Systems (Cayman)'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.

With a strong net cash balance, StrongLED Lighting Systems (Cayman) investors may not have much to worry about in the near term from a dividend perspective.

We update our data on StrongLED Lighting Systems (Cayman) 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. StrongLED Lighting Systems (Cayman) has been paying a dividend for the past four years. This company's dividend has been unstable, and with a relatively short history, we think it's a little soon to draw strong conclusions about its long term dividend potential. During the past four-year period, the first annual payment was NT$0.2 in 2017, compared to NT$0.5 last year. This works out to be a compound annual growth rate (CAGR) of approximately 26% a year over that time. The dividends haven't grown at precisely 26% every year, but this is a useful way to average out the historical rate of growth.

So, its dividends have grown at a rapid rate over this time, but payments have been cut in the past. The stock may still be worth considering as part of a diversified dividend portfolio.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? StrongLED Lighting Systems (Cayman)'s earnings per share have shrunk at 10% 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 StrongLED Lighting Systems (Cayman)'s earnings per share, which support the dividend, have been anything but stable.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. It's great to see that StrongLED Lighting Systems (Cayman) is paying out a low percentage of its earnings and cash flow. Earnings per share are down, and StrongLED Lighting Systems (Cayman)'s dividend has been cut at least once in the past, which is disappointing. Ultimately, StrongLED Lighting Systems (Cayman) comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Just as an example, we've come accross 4 warning signs for StrongLED Lighting Systems (Cayman) you should be aware of, and 1 of them is potentially serious.

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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