Is Taiwan Styrene Monomer Corporation's (TPE:1310) 2.3% Dividend Sustainable?

Dividend paying stocks like Taiwan Styrene Monomer Corporation (TPE:1310) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

While Taiwan Styrene Monomer's 2.3% dividend yield is not the highest, we think its lengthy payment history is quite interesting. Remember though, due to the recent spike in its share price, Taiwan Styrene Monomer's yield will look lower, even though the market may now be factoring in an improvement in its long-term prospects. Some simple research can reduce the risk of buying Taiwan Styrene Monomer for its dividend - read on to learn more.

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. 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 92% of Taiwan Styrene Monomer's profits were paid out as dividends in the last 12 months. Its payout ratio is quite high, and the dividend is not well covered by earnings. If earnings are growing or the company has a large cash balance, this might be sustainable - still, we think it is a concern.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Unfortunately, while Taiwan Styrene Monomer 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.

With a strong net cash balance, Taiwan Styrene Monomer investors may not have much to worry about in the near term from a dividend perspective.

We update our data on Taiwan Styrene Monomer every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Taiwan Styrene Monomer has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was NT$0.7 in 2011, compared to NT$0.5 last year. The dividend has shrunk at around 2.7% a year during that period. Taiwan Styrene Monomer's dividend hasn't shrunk linearly at 2.7% per annum, but the CAGR is a useful estimate of the historical rate of change.

A shrinking dividend over a 10-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

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. Taiwan Styrene Monomer's earnings per share have shrunk at 16% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Taiwan Styrene Monomer's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Taiwan Styrene Monomer's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're a bit uncomfortable with Taiwan Styrene Monomer paying out a high percentage of both its cashflow and earnings. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. There are a few too many issues for us to get comfortable with Taiwan Styrene Monomer from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come accross 5 warning signs for Taiwan Styrene Monomer you should be aware of, and 1 of them makes us a bit uncomfortable.

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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