Should You Buy Forest Water Environmental Engineering Co., Ltd. (TPE:8473) For Its Dividend?

Is Forest Water Environmental Engineering Co., Ltd. (TPE:8473) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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 six-year payment history and a 4.7% yield, many investors probably find Forest Water Environmental Engineering intriguing. We'd agree the yield does look enticing. Some simple research can reduce the risk of buying Forest Water Environmental Engineering 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. In the last year, Forest Water Environmental Engineering paid out 87% of its profit as dividends. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. With a cash payout ratio of 170%, Forest Water Environmental Engineering's dividend payments are poorly covered by cash flow. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely. While Forest Water Environmental Engineering's dividends were covered by the company's reported profits, free cash flow is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Forest Water Environmental Engineering to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

We update our data on Forest Water Environmental Engineering every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the data, we can see that Forest Water Environmental Engineering has been paying a dividend for the past six years. It's good to see that Forest Water Environmental Engineering has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past six-year period, the first annual payment was NT$3.6 in 2015, compared to NT$2.0 last year. The dividend has shrunk at around 9.3% a year during that period. Forest Water Environmental Engineering's dividend hasn't shrunk linearly at 9.3% per annum, but the CAGR is a useful estimate of the historical rate of change.

We struggle to make a case for buying Forest Water Environmental Engineering for its dividend, given that payments have shrunk over the past six years.

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. It's not great to see that Forest Water Environmental Engineering's have fallen at approximately 5.2% over the past five years. 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

To summarise, shareholders should always check that Forest Water Environmental Engineering's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think Forest Water Environmental Engineering has an acceptable payout ratio, although its dividend was not well covered by cashflow. Earnings per share are down, and Forest Water Environmental Engineering's dividend has been cut at least once in the past, which is disappointing. In this analysis, Forest Water Environmental Engineering doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Just as an example, we've come accross 3 warning signs for Forest Water Environmental Engineering you should be aware of, and 2 of them make us uncomfortable.

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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