Read This Before Buying Sun Race Sturmey-Archer Inc. (TPE:1526) For Its Dividend

Today we'll take a closer look at Sun Race Sturmey-Archer Inc. (TPE:1526) 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. 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.

In this case, Sun Race Sturmey-Archer likely looks attractive to dividend investors, given its 3.4% dividend yield and five-year payment history. It sure looks interesting on these metrics - but there's always more to the story. Some simple research can reduce the risk of buying Sun Race Sturmey-Archer for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Sun Race Sturmey-Archer!

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. Looking at the data, we can see that 61% of Sun Race Sturmey-Archer's profits were paid out as dividends in the last 12 months. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Sun Race Sturmey-Archer's cash payout ratio last year was 12%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

We update our data on Sun Race Sturmey-Archer every 24 hours, so you can always get our latest analysis of its financial health, 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. Looking at the data, we can see that Sun Race Sturmey-Archer has been paying a dividend for the past five years. During the past five-year period, the first annual payment was NT$0.4 in 2016, compared to NT$1.8 last year. Dividends per share have grown at approximately 35% per year over this time.

We're not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Sun Race Sturmey-Archer has grown its earnings per share at 15% per annum over the past five years. Sun Race Sturmey-Archer's earnings per share have grown rapidly in recent years, although more than half of its profits are being paid out as dividends, which makes us wonder if the company has a limited number of reinvestment opportunities in its business.

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. First, we think Sun Race Sturmey-Archer has an acceptable payout ratio and its dividend is well covered by cashflow. We were also glad to see it growing earnings, although its dividend history is not as long as we'd like. Overall we think Sun Race Sturmey-Archer is an interesting dividend stock, although it could be better.

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. For example, we've picked out 1 warning sign for Sun Race Sturmey-Archer that investors should know about before committing capital to this stock.

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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