Is Ta Chen Stainless Pipe Co., Ltd. (TPE:2027) A Strong Dividend Stock?

Today we'll take a closer look at Ta Chen Stainless Pipe Co., Ltd. (TPE:2027) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. 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.

With Ta Chen Stainless Pipe yielding 3.0% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. We'd guess that plenty of investors have purchased it for the income. That said, the recent jump in the share price will make Ta Chen Stainless Pipe's dividend yield look smaller, even though the company prospects could be improving. Some simple analysis can reduce the risk of holding Ta Chen Stainless Pipe for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Ta Chen Stainless Pipe!

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. Although Ta Chen Stainless Pipe pays a dividend, it was loss-making during the past year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

Ta Chen Stainless Pipe paid out 178% of its free cash flow last year, which we think is concerning if cash flows do not improve. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely.

Consider getting our latest analysis on Ta Chen Stainless Pipe'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. For the purpose of this article, we only scrutinise the last decade of Ta Chen Stainless Pipe's dividend payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was NT$0.2 in 2010, compared to NT$1.0 last year. This works out to be a compound annual growth rate (CAGR) of approximately 17% a year over that time. The dividends haven't grown at precisely 17% every year, but this is a useful way to average out the historical rate of growth.

Ta Chen Stainless Pipe 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

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger 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 Ta Chen Stainless Pipe has grown its earnings per share at 22% per annum over the past five years.

Conclusion

To summarise, shareholders should always check that Ta Chen Stainless Pipe'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 Ta Chen Stainless Pipe paying a dividend while loss-making, especially since the dividend was also not well covered by free cash flow. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. In summary, Ta Chen Stainless Pipe has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 4 warning signs for Ta Chen Stainless Pipe (of which 1 can't be ignored!) 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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