Should You Buy Pan Asia Chemical Co. (GTSM:4707) For Its Dividend?

Is Pan Asia Chemical Co. (GTSM:4707) 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 your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

Investors might not know much about Pan Asia Chemical's dividend prospects, even though it has been paying dividends for the last five years and offers a 1.0% yield. A 1.0% yield is not inspiring, but the longer payment history has some appeal. Some simple analysis can reduce the risk of holding Pan Asia Chemical for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Pan Asia Chemical!

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, 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, Pan Asia Chemical paid out 18% of its profit as dividends. We'd say its dividends are thoroughly covered by earnings.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Pan Asia Chemical's cash payout ratio in the last year was 39%, which suggests dividends were well covered by cash generated by the business. 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.

Remember, you can always get a snapshot of Pan Asia Chemical's latest financial position, by checking our visualisation of its financial health.

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. Pan Asia Chemical has been paying a dividend for the past five years. During the past five-year period, the first annual payment was NT$0.07 in 2016, compared to NT$0.1 last year. This works out to be a compound annual growth rate (CAGR) of approximately 16% a year over that time.

Pan Asia Chemical has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Pan Asia Chemical has grown its earnings per share at 4.1% per annum over the past five years. Growth has been hard to come by. However, the payout ratio is low, and some companies can deliver adequate dividend performance simply by increasing the payout ratio.

Conclusion

To summarise, shareholders should always check that Pan Asia Chemical's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that Pan Asia Chemical has low and conservative payout ratios. Second, earnings growth has been ordinary, and its history of dividend payments is shorter than we'd like. Overall we think Pan Asia Chemical is an interesting dividend stock, although it could be better.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Case in point: We've spotted 2 warning signs for Pan Asia Chemical (of which 1 makes us a bit uncomfortable!) 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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