Does Ability Enterprise Co., Ltd. (TPE:2374) Have A Place In Your Dividend Stock Portfolio?

Dividend paying stocks like Ability Enterprise Co., Ltd. (TPE:2374) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

A slim 2.1% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Ability Enterprise could have potential. Some simple analysis can reduce the risk of holding Ability Enterprise for its dividend, and we'll focus on the most important aspects below.

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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 Ability Enterprise 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.

Unfortunately, while Ability Enterprise pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.

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

We update our data on Ability Enterprise 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. For the purpose of this article, we only scrutinise the last decade of Ability Enterprise's dividend payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was NT$3.6 in 2011, compared to NT$0.3 last year. The dividend has fallen 92% over that period.

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

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. Ability Enterprise's EPS have fallen by approximately 66% 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 Ability Enterprise's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Ability Enterprise'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 a dividend despite reporting a loss, and the dividend was also not well 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. Using these criteria, Ability Enterprise looks quite suboptimal from a dividend investment perspective.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Ability Enterprise has 2 warning signs (and 1 which doesn't sit too well with us) 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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