Should You Buy Chiu Ting Machinery Co., Ltd. (TPE:1539) For Its 3.9% Dividend?

Today we'll take a closer look at Chiu Ting Machinery Co., Ltd. (TPE:1539) 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 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.

With a goodly-sized dividend yield despite a relatively short payment history, investors might be wondering if Chiu Ting Machinery is a new dividend aristocrat in the making. It sure looks interesting on these metrics - but there's always more to the story. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

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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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Although Chiu Ting Machinery pays a dividend, it was loss-making during the past year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Last year, Chiu Ting Machinery paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

We update our data on Chiu Ting Machinery every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Chiu Ting Machinery has been paying a dividend for the past six years. It's good to see that Chiu Ting Machinery 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 six-year period, the first annual payment was NT$0.9 in 2014, compared to NT$0.8 last year. The dividend has shrunk at around 1.8% a year during that period. Chiu Ting Machinery's dividend hasn't shrunk linearly at 1.8% per annum, but the CAGR is a useful estimate of the historical rate of change.

A shrinking dividend over a six-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 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. Chiu Ting Machinery's earnings per share have shrunk at 34% 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 Chiu Ting Machinery's earnings per share, which support the dividend, have been anything but stable.

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. It's a concern to see that the company paid a dividend despite reporting a loss, and the dividend was also not well covered by free cash flow. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. There are a few too many issues for us to get comfortable with Chiu Ting Machinery from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

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. Case in point: We've spotted 4 warning signs for Chiu Ting Machinery (of which 2 are potentially serious!) you should know about.

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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