Don't Buy KMC (Kuei Meng) International Inc. (TWSE:5306) For Its Next Dividend Without Doing These Checks

KMC (Kuei Meng) International Inc. (TWSE:5306) is about to trade ex-dividend in the next 3 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Accordingly, KMC (Kuei Meng) International investors that purchase the stock on or after the 19th of December will not receive the dividend, which will be paid on the 15th of January.

The company's next dividend payment will be NT$1.247508 per share, on the back of last year when the company paid a total of NT$2.33 to shareholders. Last year's total dividend payments show that KMC (Kuei Meng) International has a trailing yield of 1.8% on the current share price of NT$127.00. If you buy this business for its dividend, you should have an idea of whether KMC (Kuei Meng) International's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for KMC (Kuei Meng) International

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. KMC (Kuei Meng) International is paying out an acceptable 60% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether KMC (Kuei Meng) International generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 41% of the free cash flow it generated, which is a comfortable payout ratio.

It's positive to see that KMC (Kuei Meng) International's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

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. So we're not too excited that KMC (Kuei Meng) International's earnings are down 2.1% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. KMC (Kuei Meng) International has delivered 7.4% dividend growth per year on average over the past 10 years. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

To Sum It Up

Is KMC (Kuei Meng) International worth buying for its dividend? The payout ratios are within a reasonable range, implying the dividend may be sustainable. Declining earnings are a serious concern, however, and could pose a threat to the dividend in future. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we're not all that optimistic on its dividend prospects.

So if you want to do more digging on KMC (Kuei Meng) International, you'll find it worthwhile knowing the risks that this stock faces. For example, we've found 1 warning sign for KMC (Kuei Meng) International that we recommend you consider before investing in the business.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.