Why It Might Not Make Sense To Buy KMC (Kuei Meng) International Inc. (TWSE:5306) For Its Upcoming Dividend

KMC (Kuei Meng) International Inc. (TWSE:5306) is about to trade ex-dividend in the next four days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible 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. Accordingly, KMC (Kuei Meng) International investors that purchase the stock on or after the 16th of September will not receive the dividend, which will be paid on the 16th of October.

The company's next dividend payment will be NT$0.72303525 per share, on the back of last year when the company paid a total of NT$2.33 to shareholders. Based on the last year's worth of payments, KMC (Kuei Meng) International stock has a trailing yield of around 1.6% on the current share price of NT$148.50. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for KMC (Kuei Meng) International

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. KMC (Kuei Meng) International paid out 60% of its earnings to investors last year, a normal payout level for most businesses. 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 92% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

KMC (Kuei Meng) International paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were KMC (Kuei Meng) International to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see KMC (Kuei Meng) International's earnings per share have dropped 6.1% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

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 an average of 7.4% per year annual increase in its dividend, based on the past 10 years of dividend payments. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.

The Bottom Line

Should investors buy KMC (Kuei Meng) International for the upcoming dividend? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of KMC (Kuei Meng) International.

With that in mind though, if the poor dividend characteristics of KMC (Kuei Meng) International don't faze you, it's worth being mindful of the risks involved with this business. Case in point: We've spotted 1 warning sign for KMC (Kuei Meng) International you should be aware of.

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

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

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.