Are Dividend Investors Making A Mistake With Universal Textile Co., Ltd. (TPE:1445)?

Is Universal Textile Co., Ltd. (TPE:1445) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

A 1.8% yield is nothing to get excited about, but investors probably think the long payment history suggests Universal Textile has some staying power. During the year, the company also conducted a buyback equivalent to around 1.0% of its market capitalisation. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Explore this interactive chart for our latest analysis on Universal Textile!

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. Although Universal Textile pays a dividend, it was loss-making during the past year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Universal Textile's cash payout ratio last year was 22%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout.

With a strong net cash balance, Universal Textile investors may not have much to worry about in the near term from a dividend perspective.

Remember, you can always get a snapshot of Universal Textile's latest financial position, by checking our visualisation of its financial health.

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. Universal Textile has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was NT$0.2 in 2011, compared to NT$0.2 last year. Dividend payments have shrunk at a rate of less than 1% per annum over this time frame.

We struggle to make a case for buying Universal Textile for its dividend, given that payments have shrunk over the past 10 years.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Universal Textile's EPS have fallen by approximately 76% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Universal Textile's earnings per share, which support the dividend, have been anything but stable.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We're a bit uncomfortable with the company paying a dividend while being loss-making, although at least the dividend was covered by free cash flow. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. With this information in mind, we think Universal Textile may not be an ideal dividend stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 2 warning signs for Universal Textile (1 is potentially serious!) 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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