Is Leechi Machinery Industry Ltd. Co.'s (TPE:1517) 1.5% Dividend Sustainable?

Today we'll take a closer look at Leechi Machinery Industry Ltd. Co. (TPE:1517) 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. 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 1.5% yield is nothing to get excited about, but investors probably think the long payment history suggests Leechi Machinery Industry has some staying power. The company also bought back stock equivalent to around 0.7% of market capitalisation this year. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Leechi Machinery Industry paid out 137% of its profit as dividends. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Last year, Leechi Machinery Industry paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

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

Consider getting our latest analysis on Leechi Machinery Industry's financial position here.

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. Leechi Machinery Industry has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of 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$0.6 in 2011, compared to NT$0.2 last year. This works out to a decline of approximately 67% over that time.

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

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. Leechi Machinery Industry's earnings per share have shrunk at 29% 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 Leechi Machinery Industry's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Leechi Machinery Industry's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. It's a concern to see that the company paid out such a high percentage of its earnings and cashflow as dividends. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In this analysis, Leechi Machinery Industry doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Just as an example, we've come accross 2 warning signs for Leechi Machinery Industry you should be aware of, and 1 of them doesn't sit too well with us.

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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