Don't Race Out To Buy FSP Technology Inc. (TWSE:3015) Just Because It's Going Ex-Dividend

Readers hoping to buy FSP Technology Inc. (TWSE:3015) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, FSP Technology investors that purchase the stock on or after the 20th of June will not receive the dividend, which will be paid on the 10th of July.

The company's next dividend payment will be NT$3.20 per share, on the back of last year when the company paid a total of NT$3.20 to shareholders. Last year's total dividend payments show that FSP Technology has a trailing yield of 4.8% on the current share price of NT$67.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether FSP Technology can afford its dividend, and if the dividend could grow.

View our latest analysis for FSP Technology

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Last year FSP Technology paid out 95% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether FSP Technology generated enough free cash flow to afford its dividend. Over the past year it paid out 147% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

FSP Technology 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.

Cash is slightly more important than profit from a dividend perspective, but given FSP Technology's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

Click here to see how much of its profit FSP Technology paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. It's encouraging to see FSP Technology has grown its earnings rapidly, up 53% a year for the past five years. FSP Technology's dividend was not well covered by earnings, although at least its earnings per share are growing quickly. Generally, when a company is growing this quickly and paying out all of its earnings as dividends, it can suggest either that the company is borrowing heavily to fund its growth, or that earnings growth is likely to slow due to lack of reinvestment.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, FSP Technology has increased its dividend at approximately 5.9% a year on average. Earnings per share have been growing much quicker than dividends, potentially because FSP Technology is keeping back more of its profits to grow the business.

Final Takeaway

Is FSP Technology worth buying for its dividend? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that in mind though, if the poor dividend characteristics of FSP Technology don't faze you, it's worth being mindful of the risks involved with this business. Every company has risks, and we've spotted 1 warning sign for FSP Technology you should know about.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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