Why It Might Not Make Sense To Buy Taiwan Shin Kong Security Co., Ltd. (TWSE:9925) For Its Upcoming Dividend

Taiwan Shin Kong Security Co., Ltd. (TWSE:9925) is about to trade ex-dividend in the next three days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order 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, Taiwan Shin Kong Security investors that purchase the stock on or after the 25th of July will not receive the dividend, which will be paid on the 23rd of August.

The company's next dividend payment will be NT$2.00 per share, on the back of last year when the company paid a total of NT$2.00 to shareholders. Looking at the last 12 months of distributions, Taiwan Shin Kong Security has a trailing yield of approximately 4.7% on its current stock price of NT$42.30. If you buy this business for its dividend, you should have an idea of whether Taiwan Shin Kong Security's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Taiwan Shin Kong Security

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Its dividend payout ratio is 82% 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. It could become a concern if earnings started to decline. 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. Taiwan Shin Kong Security paid out more free cash flow than it generated - 114%, 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.

Taiwan Shin Kong Security 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 Taiwan Shin Kong Security'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 Taiwan Shin Kong Security's ability to maintain its dividend.

Click here to see how much of its profit Taiwan Shin Kong Security paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Taiwan Shin Kong Security earnings per share are up 2.6% per annum over the last five years. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Taiwan Shin Kong Security has increased its dividend at approximately 1.3% a year on average.

The Bottom Line

Is Taiwan Shin Kong Security an attractive dividend stock, or better left on the shelf? Earnings per share have grown somewhat, although Taiwan Shin Kong Security paid out over half its profits and the dividend was not well covered by free cash flow. Bottom line: Taiwan Shin Kong Security has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of Taiwan Shin Kong Security don't faze you, it's worth being mindful of the risks involved with this business. In terms of investment risks, we've identified 1 warning sign with Taiwan Shin Kong Security and understanding them should be part of your investment process.

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