Something To Consider Before Buying Renjie Oldsichuan Catering Management Consultant Co., Ltd. (GTSM:2741) For The 9.7% Dividend

Is Renjie Oldsichuan Catering Management Consultant Co., Ltd. (GTSM:2741) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

With a goodly-sized dividend yield despite a relatively short payment history, investors might be wondering if Renjie Oldsichuan Catering Management Consultant is a new dividend aristocrat in the making. It sure looks interesting on these metrics - but there's always more to the story. There are a few simple ways to reduce the risks of buying Renjie Oldsichuan Catering Management Consultant for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Renjie Oldsichuan Catering Management Consultant!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 189% of Renjie Oldsichuan Catering Management Consultant's profits were paid out as dividends in the last 12 months. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Renjie Oldsichuan Catering Management Consultant paid out 138% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely. As Renjie Oldsichuan Catering Management Consultant'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.

While the above analysis focuses on dividends relative to a company's earnings, we do note Renjie Oldsichuan Catering Management Consultant's strong net cash position, which will let it pay larger dividends for a time, should it choose.

We update our data on Renjie Oldsichuan Catering Management Consultant every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Renjie Oldsichuan Catering Management Consultant has been paying a dividend for the past six years. It's good to see that Renjie Oldsichuan Catering Management Consultant has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past six-year period, the first annual payment was NT$2.4 in 2015, compared to NT$4.0 last year. Dividends per share have grown at approximately 8.9% per year over this time. The dividends haven't grown at precisely 8.9% every year, but this is a useful way to average out the historical rate of growth.

A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Over the past five years, it looks as though Renjie Oldsichuan Catering Management Consultant's EPS have declined at around 6.7% a year. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company's dividend.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. It's a concern to see that the company paid out such a high percentage of its earnings and cashflow as dividends. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. Using these criteria, Renjie Oldsichuan Catering Management Consultant looks quite suboptimal from a dividend investment perspective.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 4 warning signs for Renjie Oldsichuan Catering Management Consultant that investors should know about before committing capital to this stock.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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This article by Simply Wall St is general in nature. 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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