Is Li Kang Biomedical Co., Ltd. (GTSM:6242) A Smart Choice For Dividend Investors?

By
Simply Wall St
Published
March 09, 2021
TPEX:6242

Today we'll take a closer look at Li Kang Biomedical Co., Ltd. (GTSM:6242) 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. 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.

In this case, Li Kang Biomedical likely looks attractive to dividend investors, given its 4.7% dividend yield and five-year payment history. We'd agree the yield does look enticing. Some simple analysis can reduce the risk of holding Li Kang Biomedical for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Li Kang Biomedical!

historic-dividend
GTSM:6242 Historic Dividend March 10th 2021

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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 64% of Li Kang Biomedical's profits were paid out as dividends in the last 12 months. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. The company paid out 56% of its free cash flow, which is not bad per se, but does start to limit the amount of cash Li Kang Biomedical has available to meet other needs. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

Remember, you can always get a snapshot of Li Kang Biomedical'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. Looking at the data, we can see that Li Kang Biomedical has been paying a dividend for the past five years. During the past five-year period, the first annual payment was NT$0.04 in 2016, compared to NT$2.0 last year. Dividends per share have grown at approximately 114% per year over this time. The dividends haven't grown at precisely 114% every year, but this is a useful way to average out the historical rate of growth.

So, its dividends have grown at a rapid rate over this time, but payments have been cut in the past. The stock may still be worth considering as part of a diversified dividend portfolio.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Earnings have grown at around 5.6% a year for the past five years, which is better than seeing them shrink! Earnings per share are growing at an acceptable rate, although the company is paying out more than half of its profits, which we think could constrain its ability to reinvest in its business.

Conclusion

To summarise, shareholders should always check that Li Kang Biomedical's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think Li Kang Biomedical is paying out an acceptable percentage of its cashflow and profit. Unfortunately, earnings growth has also been mediocre, and the company has cut its dividend at least once in the past. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Li Kang Biomedical out there.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come accross 3 warning signs for Li Kang Biomedical you should be aware of, and 1 of them shouldn't be ignored.

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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