Are Dividend Investors Getting More Than They Bargained For With Nan Yang Dyeing & Finishing Co.,Ltd's (TPE:1410) Dividend?

Is Nan Yang Dyeing & Finishing Co.,Ltd (TPE:1410) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

A slim 2.9% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Nan Yang Dyeing & FinishingLtd could have potential. The company also bought back stock equivalent to around 4.2% of market capitalisation this year. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Explore this interactive chart for our latest analysis on Nan Yang Dyeing & FinishingLtd!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 130% of Nan Yang Dyeing & FinishingLtd's profits were paid out as dividends in the last 12 months. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Nan Yang Dyeing & FinishingLtd paid out 98% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. Cash is slightly more important than profit from a dividend perspective, but given Nan Yang Dyeing & FinishingLtd's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

While the above analysis focuses on dividends relative to a company's earnings, we do note Nan Yang Dyeing & FinishingLtd's strong net cash position, which will let it pay larger dividends for a time, should it choose.

We update our data on Nan Yang Dyeing & FinishingLtd every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. For the purpose of this article, we only scrutinise the last decade of Nan Yang Dyeing & FinishingLtd's dividend payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was NT$0.2 in 2010, compared to NT$1.0 last year. This works out to be a compound annual growth rate (CAGR) of approximately 16% a year over that time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

It's not great to see that the payment has been cut in the past. We're generally more wary of companies that have cut their dividend before, as they tend to perform worse in an economic downturn.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Nan Yang Dyeing & FinishingLtd's earnings per share have shrunk at 11% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Nan Yang Dyeing & FinishingLtd's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Nan Yang Dyeing & FinishingLtd's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Nan Yang Dyeing & FinishingLtd paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. Using these criteria, Nan Yang Dyeing & FinishingLtd looks quite suboptimal from a dividend investment perspective.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've identified 3 warning signs for Nan Yang Dyeing & FinishingLtd (1 doesn't sit too well with us!) that you should be aware of before investing.

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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