Tread With Caution Around Fulin Plastic Industry (Cayman) Holding Co., Ltd.'s (TPE:1341) 8.4% Dividend Yield

Could Fulin Plastic Industry (Cayman) Holding Co., Ltd. (TPE:1341) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

Fulin Plastic Industry (Cayman) Holding yields a solid 8.4%, although it has only been paying for two years. A high yield probably looks enticing, but investors are likely wondering about the short payment history. Some simple research can reduce the risk of buying Fulin Plastic Industry (Cayman) Holding for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Fulin Plastic Industry (Cayman) Holding!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Looking at the data, we can see that 91% of Fulin Plastic Industry (Cayman) Holding's profits were paid out as dividends in the last 12 months. With a payout ratio this high, we'd say its dividend is not well covered by earnings. This may be fine if earnings are growing, but it might not take much of a downturn for the dividend to come under pressure.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Fulin Plastic Industry (Cayman) Holding paid out 69% of its free cash flow last year, which is acceptable, but is starting to limit the amount of earnings that can be reinvested into the business. While the dividend was not well covered by profits, at least they were covered by free cash flow. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

Consider getting our latest analysis on Fulin Plastic Industry (Cayman) Holding's financial position here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. The dividend has not fluctuated much, but with a relatively short payment history, we can't be sure this is sustainable across a full market cycle. During the past two-year period, the first annual payment was NT$3.0 in 2018, compared to NT$5.0 last year. This works out to be a compound annual growth rate (CAGR) of approximately 29% a year over that time.

Fulin Plastic Industry (Cayman) Holding has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Fulin Plastic Industry (Cayman) Holding's earnings per share shrank slightly over the past year or so. A short term decline in earnings is probably nothing to get worked up over, but we'd be looking to see a return to sustainable earnings growth. One year is a short time in business, but for dividend stocks we generally prefer companies with at least some growth. We do note though, one year is too short a time to be drawing strong conclusions about a company's future prospects.

We'd also point out that Fulin Plastic Industry (Cayman) Holding issued a meaningful number of new shares in the past year. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We're not keen on the fact that Fulin Plastic Industry (Cayman) Holding paid out such a high percentage of its income, although its cashflow is in better shape. Earnings per share have been falling, and the company has a relatively short dividend history - shorter than we like, anyway. Using these criteria, Fulin Plastic Industry (Cayman) Holding looks quite suboptimal from a dividend investment perspective.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 2 warning signs for Fulin Plastic Industry (Cayman) Holding that you should be aware of before investing.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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