Should You Buy TMP Steel Corporation (GTSM:6248) For Its Dividend?

Dividend paying stocks like TMP Steel Corporation (GTSM:6248) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

With a five-year payment history and a 9.0% yield, many investors probably find TMP Steel intriguing. We'd agree the yield does look enticing. Some simple analysis can reduce the risk of holding TMP Steel for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on TMP Steel!

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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Looking at the data, we can see that 107% of TMP Steel's profits were paid out as dividends in the last 12 months. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Unfortunately, while TMP Steel pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.

Consider getting our latest analysis on TMP Steel's financial position here.

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 TMP Steel has been paying a dividend for the past five years. During the past five-year period, the first annual payment was NT$0.7 in 2015, compared to NT$2.2 last year. Dividends per share have grown at approximately 28% per year over this time. TMP Steel's dividend payments have fluctuated, so it hasn't grown 28% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

TMP Steel has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, but it might be worth considering if the business has turned a corner.

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. TMP Steel has grown its earnings per share at 7.4% per annum over the past five years. Although per-share earnings are growing at a credible rate, virtually all of the income is being paid out as dividends to shareholders. This is okay, but may limit growth in the company's future dividend payments.

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. We're a bit uncomfortable with TMP Steel paying out a high percentage of both its cashflow and earnings. Unfortunately, earnings growth has also been mediocre, and the company has cut its dividend at least once in the past. There are a few too many issues for us to get comfortable with TMP Steel from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, TMP Steel has 4 warning signs (and 1 which makes us a bit uncomfortable) we think 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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