Is Strong H Machinery Technology (Cayman) Incorporation (TPE:4560) A Risky Dividend Stock?

Today we'll take a closer look at Strong H Machinery Technology (Cayman) Incorporation (TPE:4560) 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 four-year payment history and a 9.5% yield, many investors probably find Strong H Machinery Technology (Cayman) Incorporation intriguing. We'd agree the yield does look enticing. Some simple analysis can reduce the risk of holding Strong H Machinery Technology (Cayman) Incorporation for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Strong H Machinery Technology (Cayman) Incorporation!

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. In the last year, Strong H Machinery Technology (Cayman) Incorporation paid out 191% of its profit as dividends. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Strong H Machinery Technology (Cayman) Incorporation paid out 87% of its cash flow last year. This may be sustainable but it does not leave much of a buffer for unexpected circumstances. It's good to see that while Strong H Machinery Technology (Cayman) Incorporation's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

While the above analysis focuses on dividends relative to a company's earnings, we do note Strong H Machinery Technology (Cayman) Incorporation's strong net cash position, which will let it pay larger dividends for a time, should it choose.

We update our data on Strong H Machinery Technology (Cayman) Incorporation 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. Strong H Machinery Technology (Cayman) Incorporation has been paying a dividend for the past four years. The company has been paying a stable dividend for a few years now, but we'd like to see more evidence of consistency over a longer period. During the past four-year period, the first annual payment was NT$1.6 in 2017, compared to NT$4.0 last year. Dividends per share have grown at approximately 26% per year over this time.

The dividend has been growing pretty quickly, which could be enough to get us interested even though the dividend history is relatively short. Further research may be warranted.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Over the past five years, it looks as though Strong H Machinery Technology (Cayman) Incorporation's EPS have declined at around 6.4% 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

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We're a bit uncomfortable with its high payout ratio, although at least the dividend was covered by free cash flow. Second, earnings per share have been in decline, and the dividend history is shorter than we'd like. There are a few too many issues for us to get comfortable with Strong H Machinery Technology (Cayman) Incorporation 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. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 1 warning sign for Strong H Machinery Technology (Cayman) Incorporation that investors should take into consideration.

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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