Does It Make Sense To Buy Alexander Marine Co., Ltd. (TPE:8478) For Its Yield?

Today we'll take a closer look at Alexander Marine Co., Ltd. (TPE:8478) 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.

Investors might not know much about Alexander Marine's dividend prospects, even though it has been paying dividends for the last five years and offers a 1.8% yield. A 1.8% yield is not inspiring, but the longer payment history has some appeal. The company also bought back stock equivalent to around 0.9% of market capitalisation this year. That said, the recent jump in the share price will make Alexander Marine's dividend yield look smaller, even though the company prospects could be improving. Some simple analysis can reduce the risk of holding Alexander Marine 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. Looking at the data, we can see that 96% of Alexander Marine's profits were paid out as dividends in the last 12 months. Its payout ratio is quite high, and the dividend is not well covered by earnings. If earnings are growing or the company has a large cash balance, this might be sustainable - still, we think it is a concern.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Last year, Alexander Marine paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

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

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. Looking at the data, we can see that Alexander Marine has been paying a dividend for the past five years. During the past five-year period, the first annual payment was NT$0.1 in 2016, compared to NT$1.0 last year. Dividends per share have grown at approximately 48% per year over this time. The dividends haven't grown at precisely 48% every year, but this is a useful way to average out the historical rate of growth.

Alexander Marine has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, but it might be worth considering if the business has turned a corner.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Over the past five years, it looks as though Alexander Marine's EPS have declined at around 21% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Alexander Marine'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 Alexander Marine paying out a high percentage of both its cashflow and earnings. Earnings per share are down, and Alexander Marine's dividend has been cut at least once in the past, which is disappointing. There are a few too many issues for us to get comfortable with Alexander Marine from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 3 warning signs for Alexander Marine (2 are a bit concerning!) that you should be aware of before investing.

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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