Why It Might Not Make Sense To Buy Nien Hsing Textile Co., Ltd. (TWSE:1451) For Its Upcoming Dividend

It looks like Nien Hsing Textile Co., Ltd. (TWSE:1451) is about to go ex-dividend in the next three days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Meaning, you will need to purchase Nien Hsing Textile's shares before the 4th of July to receive the dividend, which will be paid on the 2nd of August.

The company's next dividend payment will be NT$0.50155664 per share, and in the last 12 months, the company paid a total of NT$0.50 per share. Based on the last year's worth of payments, Nien Hsing Textile stock has a trailing yield of around 2.4% on the current share price of NT$20.50. If you buy this business for its dividend, you should have an idea of whether Nien Hsing Textile's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Nien Hsing Textile

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Nien Hsing Textile paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If Nien Hsing Textile didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. It paid out 104% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

Nien Hsing Textile does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

Click here to see how much of its profit Nien Hsing Textile paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Nien Hsing Textile was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Nien Hsing Textile's dividend payments per share have declined at 19% per year on average over the past 10 years, which is uninspiring. 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.

We update our analysis on Nien Hsing Textile every 24 hours, so you can always get the latest insights on its financial health, here.

The Bottom Line

Has Nien Hsing Textile got what it takes to maintain its dividend payments? First, it's not great to see the company paying a dividend despite being loss-making over the last year. Second, the dividend was not well covered by cash flow." It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

So if you're still interested in Nien Hsing Textile despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example, Nien Hsing Textile has 2 warning signs (and 1 which is potentially serious) we think you should know about.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com