Dividend Investors: Don't Be Too Quick To Buy Yuan Jen Enterprises Co.,Ltd. (TWSE:1725) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Yuan Jen Enterprises Co.,Ltd. (TWSE:1725) is about to trade ex-dividend in the next four days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase Yuan Jen EnterprisesLtd's shares on or after the 23rd of July will not receive the dividend, which will be paid on the 13th of August.

The company's upcoming dividend is NT$0.85 a share, following on from the last 12 months, when the company distributed a total of NT$0.85 per share to shareholders. Looking at the last 12 months of distributions, Yuan Jen EnterprisesLtd has a trailing yield of approximately 1.8% on its current stock price of NT$48.10. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Yuan Jen EnterprisesLtd

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Yuan Jen EnterprisesLtd paid out 68% of its earnings to investors last year, a normal payout level for most businesses. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the past year it paid out 112% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Yuan Jen EnterprisesLtd does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

Yuan Jen EnterprisesLtd paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Yuan Jen EnterprisesLtd's ability to maintain its dividend.

Click here to see how much of its profit Yuan Jen EnterprisesLtd paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That explains why we're not overly excited about Yuan Jen EnterprisesLtd's flat earnings over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Yuan Jen EnterprisesLtd has lifted its dividend by approximately 9.3% a year on average.

To Sum It Up

From a dividend perspective, should investors buy or avoid Yuan Jen EnterprisesLtd? Yuan Jen EnterprisesLtd is paying out a reasonable percentage of its income yet an uncomfortably high 112% of its cash flow as dividends. What's more, earnings have barely grown. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that in mind though, if the poor dividend characteristics of Yuan Jen EnterprisesLtd don't faze you, it's worth being mindful of the risks involved with this business. Our analysis shows 2 warning signs for Yuan Jen EnterprisesLtd that we strongly recommend you have a look at before investing in the company.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com