How Does Kenmec Mechanical Engineering Co., Ltd. (GTSM:6125) Fare As A Dividend Stock?

Dividend paying stocks like Kenmec Mechanical Engineering Co., Ltd. (GTSM:6125) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

In this case, Kenmec Mechanical Engineering likely looks attractive to investors, given its 6.5% dividend yield and a payment history of over ten years. It would not be a surprise to discover that many investors buy it for the dividends. There are a few simple ways to reduce the risks of buying Kenmec Mechanical Engineering for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Kenmec Mechanical Engineering!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Although Kenmec Mechanical Engineering pays a dividend, it was loss-making during the past year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

Unfortunately, while Kenmec Mechanical Engineering pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.

Consider getting our latest analysis on Kenmec Mechanical Engineering's financial position 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. For the purpose of this article, we only scrutinise the last decade of Kenmec Mechanical Engineering's dividend payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was NT$0.5 in 2010, compared to NT$2.0 last year. Dividends per share have grown at approximately 16% per year over this time. Kenmec Mechanical Engineering's dividend payments have fluctuated, so it hasn't grown 16% every year, but the CAGR is a useful rule of thumb for approximating the historical 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? Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Kenmec Mechanical Engineering has grown its earnings per share at 39% per annum over the past five years.

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. Kenmec Mechanical Engineering's dividend is not well covered by free cash flow, plus it paid a dividend while being unprofitable. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. With this information in mind, we think Kenmec Mechanical Engineering may not be an ideal dividend stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 3 warning signs for Kenmec Mechanical Engineering that investors should know about before committing capital to this stock.

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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