Stock Analysis

Are Dividend Investors Getting More Than They Bargained For With Hsin Yung Chien Co., Ltd.'s (TPE:2114) Dividend?

TWSE:2114
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Dividend paying stocks like Hsin Yung Chien Co., Ltd. (TPE:2114) 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. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

In this case, Hsin Yung Chien likely looks attractive to investors, given its 5.5% 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. Some simple analysis can reduce the risk of holding Hsin Yung Chien for its dividend, and we'll focus on the most important aspects below.

Click the interactive chart for our full dividend analysis

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TSEC:2114 Historic Dividend December 31st 2020

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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 93% of Hsin Yung Chien's profits were paid out as dividends in the last 12 months. With a payout ratio this high, we'd say its dividend is not well covered by earnings. This may be fine if earnings are growing, but it might not take much of a downturn for the dividend to come under pressure.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Hsin Yung Chien paid out 223% of its free cash flow last year, which we think is concerning if cash flows do not improve. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely. Cash is slightly more important than profit from a dividend perspective, but given Hsin Yung Chien's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

While the above analysis focuses on dividends relative to a company's earnings, we do note Hsin Yung Chien's strong net cash position, which will let it pay larger dividends for a time, should it choose.

Remember, you can always get a snapshot of Hsin Yung Chien's latest financial position, by checking our visualisation of its financial health.

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 Hsin Yung Chien'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$1.2 in 2010, compared to NT$5.0 last year. Dividends per share have grown at approximately 16% per year over this time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

It's not great to see that the payment has been cut in the past. We're generally more wary of companies that have cut their dividend before, as they tend to perform worse in an economic downturn.

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? Over the past five years, it looks as though Hsin Yung Chien's EPS have declined at around 3.9% a year. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.

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 out such a high percentage of its earnings and cashflow as dividends. 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 Hsin Yung Chien from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 1 warning sign for Hsin Yung Chien that you should be aware of before investing.

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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