Read This Before Buying Evermore Chemical Industry Co., Ltd. (TPE:1735) For Its Dividend

Is Evermore Chemical Industry Co., Ltd. (TPE:1735) 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, Evermore Chemical Industry likely looks attractive to investors, given its 3.8% dividend yield and a payment history of over ten years. It would not be a surprise to discover that many investors buy it for the dividends. 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

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. 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, Evermore Chemical Industry paid out 143% of its profit as dividends. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Evermore Chemical Industry paid out 19% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable. It's good to see that while Evermore Chemical Industry's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Consider getting our latest analysis on Evermore Chemical Industry'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 Evermore Chemical Industry's dividend 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$1.1 in 2011, compared to NT$0.7 last year. This works out to be a decline of approximately 5.1% per year over that time. Evermore Chemical Industry's dividend hasn't shrunk linearly at 5.1% per annum, but the CAGR is a useful estimate of the historical rate of change.

We struggle to make a case for buying Evermore Chemical Industry for its dividend, given that payments have shrunk over the past 10 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. Evermore Chemical Industry's earnings per share have shrunk at 20% 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 Evermore Chemical Industry's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Evermore Chemical Industry'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 not keen on the fact that Evermore Chemical Industry paid out such a high percentage of its income, although its cashflow is in better shape. Earnings per share are down, and Evermore Chemical Industry's dividend has been cut at least once in the past, which is disappointing. In summary, Evermore Chemical Industry has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, Evermore Chemical Industry has 5 warning signs (and 1 which is a bit concerning) we think you should know about.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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