Here's Why We're Wary Of Buying Life Travel & Tourist Service's (GTSM:2745) For Its Upcoming Dividend

By
Simply Wall St
Published
August 16, 2020
GTSM:2745

It looks like Life Travel & Tourist Service Co., Ltd. (GTSM:2745) is about to go ex-dividend in the next day or so. You can purchase shares before the 19th of August in order to receive the dividend, which the company will pay on the 15th of September.

Life Travel & Tourist Service's next dividend payment will be NT$0.30 per share. Last year, in total, the company distributed NT$0.30 to shareholders. Based on the last year's worth of payments, Life Travel & Tourist Service has a trailing yield of 1.9% on the current stock price of NT$15.65. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Life Travel & Tourist Service has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Life Travel & Tourist Service

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Life Travel & Tourist Service reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Luckily it paid out just 8.6% of its free cash flow last year.

Click here to see how much of its profit Life Travel & Tourist Service paid out over the last 12 months.

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GTSM:2745 Historic Dividend August 17th 2020

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Life Travel & Tourist Service 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. Life Travel & Tourist Service's dividend payments per share have declined at 35% per year on average over the past five years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

Remember, you can always get a snapshot of Life Travel & Tourist Service's financial health, by checking our visualisation of its financial health, here.

To Sum It Up

From a dividend perspective, should investors buy or avoid Life Travel & Tourist Service? We're a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that in mind though, if the poor dividend characteristics of Life Travel & Tourist Service don't faze you, it's worth being mindful of the risks involved with this business. Every company has risks, and we've spotted 3 warning signs for Life Travel & Tourist Service (of which 1 is potentially serious!) you should know about.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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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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