Don't Buy Shin Zu Shing Co., Ltd. (TWSE:3376) For Its Next Dividend Without Doing These Checks

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Shin Zu Shing Co., Ltd. (TWSE:3376) is about to go ex-dividend in just four days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase Shin Zu Shing's shares before the 30th of July in order to be eligible for the dividend, which will be paid on the 28th of August.

The company's next dividend payment will be NT$4.00 per share, on the back of last year when the company paid a total of NT$4.00 to shareholders. Based on the last year's worth of payments, Shin Zu Shing stock has a trailing yield of around 1.7% on the current share price of NT$235.00. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Shin Zu Shing

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Its dividend payout ratio is 75% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be concerned if earnings began to decline. A useful secondary check can be to evaluate whether Shin Zu Shing generated enough free cash flow to afford its dividend. Shin Zu Shing paid out more free cash flow than it generated - 122%, to be precise - last year, which we think is concerningly 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.

Shin Zu Shing 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.

While Shin Zu Shing's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Shin Zu Shing's ability to maintain its dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's not ideal to see Shin Zu Shing's earnings per share have been shrinking at 4.5% a year over the previous five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Shin Zu Shing has seen its dividend decline 1.2% per annum on average over the past 10 years, which is not great to see.

The Bottom Line

Is Shin Zu Shing worth buying for its dividend? Shin Zu Shing had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that being said, if you're still considering Shin Zu Shing as an investment, you'll find it beneficial to know what risks this stock is facing. Be aware that Shin Zu Shing is showing 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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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