Is Nien Hsing Textile Co., Ltd. (TPE:1451) A Risky Dividend Stock?

Today we'll take a closer look at Nien Hsing Textile Co., Ltd. (TPE:1451) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

While Nien Hsing Textile's 2.8% dividend yield is not the highest, we think its lengthy payment history is quite interesting. That said, the recent jump in the share price will make Nien Hsing Textile's dividend yield look smaller, even though the company prospects could be improving. 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.

Click the interactive chart for our full dividend analysis

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. Although it reported a loss over the past 12 months, Nien Hsing Textile currently pays a dividend. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

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

We update our data on Nien Hsing Textile every 24 hours, so you can always get our latest analysis of its financial health, 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. Nien Hsing 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$3.0 in 2011, compared to NT$0.6 last year. This works out to a decline of approximately 80% over that time.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

Dividend Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Nien Hsing Textile's EPS have fallen by approximately 58% per year during the past five years. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

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 it paying a dividend while reporting a loss over the past year. Earnings per share are down, and Nien Hsing Textile's dividend has been cut at least once in the past, which is disappointing. With this information in mind, we think Nien Hsing Textile may not be an ideal dividend stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. To that end, Nien Hsing Textile has 3 warning signs (and 1 which is significant) we think you should know about.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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