Should You Buy Lion Travel Service Co., Ltd. (TPE:2731) For Its Dividend?

Could Lion Travel Service Co., Ltd. (TPE:2731) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. 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 2.1% yield and a eight-year payment history, investors probably think Lion Travel 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. That said, the recent jump in the share price will make Lion Travel Service's dividend yield look smaller, even though the company prospects could be improving. There are a few simple ways to reduce the risks of buying Lion Travel Service for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Lion Travel Service!

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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Although it reported a loss over the past 12 months, Lion Travel Service currently pays a dividend. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Unfortunately, while Lion Travel 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.

With a strong net cash balance, Lion Travel Service investors may not have much to worry about in the near term from a dividend perspective.

We update our data on Lion Travel Service every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. The first recorded dividend for Lion Travel Service, in the last decade, was eight years ago. It's good to see that Lion Travel Service 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 eight-year period, the first annual payment was NT$1.8 in 2013, compared to NT$2.0 last year. This works out to be a compound annual growth rate (CAGR) of approximately 1.3% a year over that time. The dividends haven't grown at precisely 1.3% every year, but this is a useful way to average out the historical rate of growth.

We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments, we don't think this is an attractive combination.

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. Lion Travel Service's earnings per share have shrunk at 29% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Lion Travel Service's earnings per share, which support the dividend, have been anything but stable.

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. Lion Travel Service's dividend is not well covered by free cash flow, plus it paid a dividend while being unprofitable. Earnings per share are down, and Lion Travel Service's dividend has been cut at least once in the past, which is disappointing. In this analysis, Lion Travel Service doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Just as an example, we've come accross 4 warning signs for Lion Travel Service you should be aware of, and 2 of them are a bit concerning.

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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