Don't Buy Chyang Sheng Texing Co., Ltd. (TWSE:1463) For Its Next Dividend Without Doing These Checks

It looks like Chyang Sheng Texing Co., Ltd. (TWSE:1463) is about to go ex-dividend in the next three days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. Accordingly, Chyang Sheng Texing investors that purchase the stock on or after the 29th of August will not receive the dividend, which will be paid on the 20th of September.

The company's upcoming dividend is NT$0.50 a share, following on from the last 12 months, when the company distributed a total of NT$0.50 per share to shareholders. Looking at the last 12 months of distributions, Chyang Sheng Texing has a trailing yield of approximately 1.9% on its current stock price of NT$26.05. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Chyang Sheng Texing can afford its dividend, and if the dividend could grow.

See our latest analysis for Chyang Sheng Texing

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Chyang Sheng Texing paid out 102% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. A useful secondary check can be to evaluate whether Chyang Sheng Texing generated enough free cash flow to afford its dividend. Over the past year it paid out 196% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Chyang Sheng Texing 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.

As Chyang Sheng Texing's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see how much of its profit Chyang Sheng Texing 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. Readers will understand then, why we're concerned to see Chyang Sheng Texing's earnings per share have dropped 21% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Chyang Sheng Texing has increased its dividend at approximately 5.2% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Chyang Sheng Texing is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

From a dividend perspective, should investors buy or avoid Chyang Sheng Texing? Not only are earnings per share declining, but Chyang Sheng Texing is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. Bottom line: Chyang Sheng Texing has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Although, if you're still interested in Chyang Sheng Texing and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 2 warning signs for Chyang Sheng Texing that we recommend you consider before investing in the business.

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.