Don't Buy Formosa Taffeta Co., Ltd. (TWSE:1434) For Its Next Dividend Without Doing These Checks

It looks like Formosa Taffeta Co., Ltd. (TWSE:1434) is about to go ex-dividend in the next 4 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase Formosa Taffeta's shares before the 31st of July in order to receive the dividend, which the company will pay on the 30th of August.

The company's next dividend payment will be NT$0.50 per share, and in the last 12 months, the company paid a total of NT$0.50 per share. Looking at the last 12 months of distributions, Formosa Taffeta has a trailing yield of approximately 2.2% on its current stock price of NT$22.45. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Formosa Taffeta

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Formosa Taffeta distributed an unsustainably high 155% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out 86% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Formosa Taffeta fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Formosa Taffeta paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Formosa Taffeta's earnings per share have plummeted approximately 30% a year over the previous five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Formosa Taffeta has seen its dividend decline 6.7% per annum on average over the past 10 years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

Final Takeaway

Has Formosa Taffeta got what it takes to maintain its dividend payments? Earnings per share have been shrinking in recent times. What's more, Formosa Taffeta is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Formosa Taffeta.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Formosa Taffeta. Every company has risks, and we've spotted 3 warning signs for Formosa Taffeta (of which 1 is concerning!) you should know about.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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