Should You Or Shouldn't You: A Dividend Analysis on EPS Bio Technology Corp. (GTSM:4183)

Today we'll take a closer look at EPS Bio Technology Corp. (GTSM:4183) 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.

In this case, EPS Bio Technology likely looks attractive to dividend investors, given its 3.1% dividend yield and eight-year payment history. We'd agree the yield does look enticing. There are a few simple ways to reduce the risks of buying EPS Bio Technology for its dividend, and we'll go through these below.

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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. In the last year, EPS Bio Technology paid out 53% of its profit as dividends. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. EPS Bio Technology's cash payout ratio last year was 23%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It's positive to see that EPS Bio Technology's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

With a strong net cash balance, EPS Bio Technology investors may not have much to worry about in the near term from a dividend perspective.

Remember, you can always get a snapshot of EPS Bio Technology's latest financial position, by checking our visualisation of its financial health.

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 EPS Bio Technology, in the last decade, was eight years ago. It's good to see that EPS Bio Technology 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$0.8 in 2013, compared to NT$0.7 last year. This works out to be a decline of approximately 1.2% per year over that time. EPS Bio Technology's dividend has been cut sharply at least once, so it hasn't fallen by 1.2% every year, but this is a decent approximation of the long term change.

A shrinking dividend over a eight-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It's not great to see that EPS Bio Technology's have fallen at approximately 5.6% over the past five years. A modest decline in earnings per share is not great to see, but it doesn't automatically make a dividend unsustainable. Still, we'd vastly prefer to see EPS growth when researching dividend stocks.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. EPS Bio Technology's payout ratios are within a normal range for the average corporation, and we like that its cashflow was stronger than reported profits. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than EPS Bio Technology out there.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 2 warning signs for EPS Bio Technology that investors need to be conscious of moving forward.

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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