How Does Tongtai Machine & Tool Co., Ltd. (TPE:4526) Fare As A Dividend Stock?

Today we'll take a closer look at Tongtai Machine & Tool Co., Ltd. (TPE:4526) 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.

With a 1.4% yield and a eight-year payment history, investors probably think Tongtai Machine & Tool looks like a reliable dividend stock. A 1.4% yield is not inspiring, but the longer payment history has some appeal. Some simple research can reduce the risk of buying Tongtai Machine & Tool for its dividend - read on to learn more.

Click the interactive chart for our full dividend analysis

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. Although it reported a loss over the past 12 months, Tongtai Machine & Tool currently pays a dividend. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Tongtai Machine & Tool paid out 10% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable.

We update our data on Tongtai Machine & Tool 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. The first recorded dividend for Tongtai Machine & Tool, in the last decade, was eight years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we're cautious about the consistency of its dividend across a full economic cycle. During the past eight-year period, the first annual payment was NT$1.0 in 2012, compared to NT$0.2 last year. The dividend has fallen 79% over that period.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Tongtai Machine & Tool's earnings per share have shrunk at 25% 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 Tongtai Machine & Tool's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Tongtai Machine & Tool's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're a bit uncomfortable with the company paying a dividend while being loss-making, although at least the dividend was 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. With this information in mind, we think Tongtai Machine & Tool may not be an ideal dividend stock.

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. For instance, we've picked out 2 warning signs for Tongtai Machine & Tool that investors should take into consideration.

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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