Today we'll take a closer look at Life Travel & Tourist Service Co., Ltd. (GTSM:2745) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
With a 1.7% yield and a five-year payment history, investors probably think Life Travel & Tourist Service looks like a reliable dividend stock. A low yield is generally a turn-off, but if the prospects for earnings growth were strong, investors might be pleasantly surprised by the long-term results. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.
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. Although it reported a loss over the past 12 months, Life Travel & Tourist Service currently pays a dividend. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.
Unfortunately, while Life Travel & Tourist Service pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.
While the above analysis focuses on dividends relative to a company's earnings, we do note Life Travel & Tourist Service's strong net cash position, which will let it pay larger dividends for a time, should it choose.
We update our data on Life Travel & Tourist Service every 24 hours, so you can always get our latest analysis of its financial health, here.
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. Life Travel & Tourist Service has been paying a dividend for the past five years. During the past five-year period, the first annual payment was NT$2.5 in 2015, compared to NT$0.3 last year. This works out to a decline of approximately 88% over that time.
When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.
Dividend Growth Potential
With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Life Travel & Tourist Service's earnings per share have shrunk at 42% a year over the past five years. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.
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. We're a bit uncomfortable with Life Travel & Tourist Service paying a dividend while loss-making, especially since the dividend was also not well covered by free cash flow. Earnings per share are down, and Life Travel & Tourist Service's dividend has been cut at least once in the past, which is disappointing. There are a few too many issues for us to get comfortable with Life Travel & Tourist Service from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Life Travel & Tourist Service has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 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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