Read This Before Buying Taiwan Taffeta Fabric Co., Ltd. (TPE:1454) For Its Dividend

Today we'll take a closer look at Taiwan Taffeta Fabric Co., Ltd. (TPE:1454) 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. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

Investors might not know much about Taiwan Taffeta Fabric's dividend prospects, even though it has been paying dividends for the last nine years and offers a 3.0% yield. While the yield may not look too great, the relatively long payment history is interesting. The company also returned around 3.3% of its market capitalisation to shareholders in the form of stock buybacks over the past year. Some simple analysis can reduce the risk of holding Taiwan Taffeta Fabric for its dividend, and we'll focus on the most important aspects below.

Click the interactive chart for our full dividend analysis

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. 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. While Taiwan Taffeta Fabric pays a dividend, it reported a loss over the last year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

Taiwan Taffeta Fabric's cash payout ratio last year was 21%, which is quite low and suggests that the dividend was thoroughly covered by cash flow.

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

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

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. The first recorded dividend for Taiwan Taffeta Fabric, in the last decade, was nine years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we're cautious about the consistency of its dividend across a full economic cycle. During the past nine-year period, the first annual payment was NT$0.5 in 2012, compared to NT$0.3 last year. The dividend has shrunk at around 7.4% a year during that period. Taiwan Taffeta Fabric's dividend hasn't shrunk linearly at 7.4% per annum, but the CAGR is a useful estimate of the historical rate of change.

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

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Over the past five years, it looks as though Taiwan Taffeta Fabric's EPS have declined at around 46% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Taiwan Taffeta Fabric'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. 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. With this information in mind, we think Taiwan Taffeta Fabric may not be an ideal dividend stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, Taiwan Taffeta Fabric has 3 warning signs (and 1 which is concerning) we think you should know about.

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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