Farcent EnterpriseLtd's (TWSE:1730) Dividend Will Be Reduced To NT$2.80

Farcent Enterprise Co.,Ltd's (TWSE:1730) dividend is being reduced from last year's payment covering the same period to NT$2.80 on the 28th of August. This means the annual payment is 5.0% of the current stock price, which is above the average for the industry.

See our latest analysis for Farcent EnterpriseLtd

Farcent EnterpriseLtd Is Paying Out More Than It Is Earning

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before this announcement, Farcent EnterpriseLtd was paying out 85% of earnings, but a comparatively small 42% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

If the company can't turn things around, EPS could fall by 11.8% over the next year. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 101%, which is definitely a bit high to be sustainable going forward.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2014, the annual payment back then was NT$1.10, compared to the most recent full-year payment of NT$2.80. This means that it has been growing its distributions at 9.8% per annum over that time. A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.

Dividend Growth Potential Is Shaky

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. Farcent EnterpriseLtd's earnings per share has shrunk at 12% a year over the past five years. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough.

Our Thoughts On Farcent EnterpriseLtd's Dividend

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. Overall, we don't think this company has the makings of a good income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Farcent EnterpriseLtd has 2 warning signs (and 1 which is a bit concerning) we think you should know about. Is Farcent EnterpriseLtd not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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