Are Dividend Investors Making A Mistake With San Neng Group Holdings Co., Ltd. (TPE:6671)?

Dividend paying stocks like San Neng Group Holdings Co., Ltd. (TPE:6671) 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. 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.

San Neng Group Holdings yields a solid 6.5%, although it has only been paying for two years. A 6.5% yield does look good. Could the short payment history hint at future dividend growth? Some simple research can reduce the risk of buying San Neng Group Holdings for its dividend - read on to learn more.

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Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, San Neng Group Holdings paid out 82% of its profit as dividends. It's paying out most of its earnings, which limits the amount that can be reinvested in the business. This may indicate limited need for further capital within the business, or highlight a commitment to paying a dividend.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. San Neng Group Holdings paid out 75% of its free cash flow last year, which is acceptable, but is starting to limit the amount of earnings that can be reinvested into the business. 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.

With a strong net cash balance, San Neng Group Holdings investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on San Neng Group Holdings' financial position 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. The dividend has not fluctuated much, but with a relatively short payment history, we can't be sure this is sustainable across a full market cycle. Its most recent annual dividend was NT$3.0 per share, effectively flat on its first payment two years ago.

We like that the dividend hasn't been shrinking. However we're conscious that the company hasn't got an overly long track record of dividend payments yet, which makes us wary of relying on its dividend income.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Over the past five years, it looks as though San Neng Group Holdings' EPS have declined at around 15% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and San Neng Group Holdings' earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that San Neng Group Holdings' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think San Neng Group Holdings is paying out an acceptable percentage of its cashflow and profit. Earnings per share are down, and to our mind San Neng Group Holdings has not been paying a dividend long enough to demonstrate its resilience across economic cycles. In summary, San Neng Group Holdings has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, San Neng Group Holdings has 3 warning signs (and 1 which is concerning) 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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