Here's How We Evaluate Tah Kong Chemical Industrial Corporation's (GTSM:4706) Dividend

Is Tah Kong Chemical Industrial Corporation (GTSM:4706) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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, Tah Kong Chemical Industrial likely looks attractive to dividend investors, given its 3.6% dividend yield and nine-year payment history. It sure looks interesting on these metrics - but there's always more to the story. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Click the interactive chart for our full dividend analysis

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. Tah Kong Chemical Industrial paid out 61% of its profit as dividends, over the trailing twelve month period. 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. Tah Kong Chemical Industrial's cash payout ratio last year was 20%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout. It's positive to see that Tah Kong Chemical Industrial'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, Tah Kong Chemical Industrial investors may not have much to worry about in the near term from a dividend perspective.

We update our data on Tah Kong Chemical Industrial every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

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. The first recorded dividend for Tah Kong Chemical Industrial, in the last decade, was nine years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we're cautious about the consistency of its dividend across a full economic cycle. During the past nine-year period, the first annual payment was NT$1.0 in 2012, compared to NT$0.6 last year. The dividend has shrunk at around 5.5% a year during that period. Tah Kong Chemical Industrial's dividend hasn't shrunk linearly at 5.5% per annum, but the CAGR is a useful estimate of the historical rate of change.

We struggle to make a case for buying Tah Kong Chemical Industrial for its dividend, given that payments have shrunk over the past nine years.

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. Tah Kong Chemical Industrial's earnings per share have been essentially flat over the past five years. Flat earnings per share are acceptable for a time, but over the long term, the purchasing power of the company's dividends could be eroded by inflation. 0.5% per annum is not a particularly high rate of growth, which we find curious. If the company is struggling to grow, perhaps that's why it elects to pay out more than half of its earnings to shareholders.

Conclusion

To summarise, shareholders should always check that Tah Kong Chemical Industrial'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 Tah Kong Chemical Industrial has an acceptable payout ratio and its dividend is well covered by cashflow. Second, earnings have been essentially flat, and its history of dividend payments is chequered - having cut its dividend at least once in the past. In sum, we find it hard to get excited about Tah Kong Chemical Industrial from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 3 warning signs for Tah Kong Chemical Industrial (of which 1 doesn't sit too well with us!) 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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