Should You Or Shouldn't You: A Dividend Analysis on Taiwan Hopax Chems.Mfg.Co.,Ltd. (GTSM:6509)

Dividend paying stocks like Taiwan Hopax Chems.Mfg.Co.,Ltd. (GTSM:6509) 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. 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.

A slim 2.3% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Taiwan Hopax Chems.Mfg.Co.Ltd could have potential. During the year, the company also conducted a buyback equivalent to around 1.0% of its market capitalisation. Some simple analysis can reduce the risk of holding Taiwan Hopax Chems.Mfg.Co.Ltd for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Taiwan Hopax Chems.Mfg.Co.Ltd!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. 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. In the last year, Taiwan Hopax Chems.Mfg.Co.Ltd paid out 43% of its profit as dividends. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Plus, there is room to increase 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 57% of its free cash flow, which is not bad per se, but does start to limit the amount of cash Taiwan Hopax Chems.Mfg.Co.Ltd has available to meet other needs. It's positive to see that Taiwan Hopax Chems.Mfg.Co.Ltd'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.

Consider getting our latest analysis on Taiwan Hopax Chems.Mfg.Co.Ltd's financial position 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. For the purpose of this article, we only scrutinise the last decade of Taiwan Hopax Chems.Mfg.Co.Ltd's dividend payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was NT$0.5 in 2011, compared to NT$0.7 last year. Dividends per share have grown at approximately 4.3% per year over this time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

It's good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth, anyway. We're not that enthused by this.

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? Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Taiwan Hopax Chems.Mfg.Co.Ltd has grown its earnings per share at 11% per annum over the past five years. Earnings per share have been growing at a good rate, and the company is paying less than half its earnings as dividends. We generally think this is an attractive combination, as it permits further reinvestment in the business.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Firstly, we like that Taiwan Hopax Chems.Mfg.Co.Ltd pays out a low fraction of earnings. It pays out a higher percentage of its cashflow, although this is within acceptable bounds. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. Taiwan Hopax Chems.Mfg.Co.Ltd has a number of positive attributes, but it falls slightly short of our (admittedly high) standards. Were there evidence of a strong moat or an attractive valuation, it could still be well worth a look.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 2 warning signs for Taiwan Hopax Chems.Mfg.Co.Ltd that investors should take into consideration.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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