Three Things You Should Check Before Buying Chun Yu Works & Co., Ltd. (TPE:2012) For Its Dividend

Today we'll take a closer look at Chun Yu Works & Co., Ltd. (TPE:2012) 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.

In this case, Chun Yu Works likely looks attractive to dividend investors, given its 6.5% dividend yield and seven-year payment history. It sure looks interesting on these metrics - but there's always more to the story. There are a few simple ways to reduce the risks of buying Chun Yu Works for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Chun Yu Works!

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. 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. Chun Yu Works paid out 166% of its profit as dividends, over the trailing twelve month period. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Chun Yu Works' cash payout ratio in the last year was 43%, which suggests dividends were well covered by cash generated by the business. It's good to see that while Chun Yu Works' dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

We update our data on Chun Yu Works 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. Chun Yu Works has been paying a dividend for the past seven years. Its dividend has not fluctuated much that time, which we like, but we're conscious that the company might not yet have a track record of maintaining dividends in all economic conditions. During the past seven-year period, the first annual payment was NT$0.5 in 2013, compared to NT$1.2 last year. This works out to be a compound annual growth rate (CAGR) of approximately 13% a year over that time.

Chun Yu Works has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Chun Yu Works' EPS are effectively flat over the past five years. Flat earnings per share are acceptable for a time, but over the long term, the purchasing power of the company's dividends could be eroded by inflation.

Conclusion

To summarise, shareholders should always check that Chun Yu Works' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're not keen on the fact that Chun Yu Works paid out such a high percentage of its income, although its cashflow is in better shape. Earnings per share are down, and to our mind Chun Yu Works has not been paying a dividend long enough to demonstrate its resilience across economic cycles. In summary, Chun Yu Works has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 3 warning signs for Chun Yu Works (1 shouldn't be ignored!) that you should be aware of before investing.

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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