Does Yuen Chang Stainless Steel Co., Ltd. (TPE:2069) Have A Place In Your Dividend Stock Portfolio?

Is Yuen Chang Stainless Steel Co., Ltd. (TPE:2069) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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 a 2.9% yield and a five-year payment history, investors probably think Yuen Chang Stainless Steel looks like a reliable dividend stock. A 2.9% yield is not inspiring, but the longer payment history has some appeal. The company also bought back stock during the year, equivalent to approximately 1.5% of the company's market capitalisation at the time. Some simple research can reduce the risk of buying Yuen Chang Stainless Steel for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Yuen Chang Stainless 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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Although Yuen Chang Stainless Steel pays a dividend, it was loss-making during the past year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Yuen Chang Stainless Steel paid out 130% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. 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.

Remember, you can always get a snapshot of Yuen Chang Stainless Steel's latest financial position, by checking our visualisation of its financial health.

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. Yuen Chang Stainless Steel has been paying a dividend for the past five years. During the past five-year period, the first annual payment was NT$0.6 in 2016, compared to NT$0.5 last year. The dividend has shrunk at around 3.6% a year during that period. Yuen Chang Stainless Steel's dividend has been cut sharply at least once, so it hasn't fallen by 3.6% every year, but this is a decent approximation of the long term change.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

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? Yuen Chang Stainless Steel's EPS are effectively flat over the past five years. Flat earnings per share are acceptable for a time, but over the long term, the purchasing power of the company's dividends could be eroded by inflation. A payout ratio below 50% leaves ample room to reinvest in the business, and provides finanical flexibility. Earnings per share growth have grown slowly, which is not great, but if the retained earnings can be reinvested effectively, future growth may be stronger.

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. Yuen Chang Stainless Steel's dividend is not well covered by free cash flow, plus it paid a dividend while being unprofitable. Unfortunately, the company has not been able to generate earnings growth, and cut its dividend at least once in the past. Using these criteria, Yuen Chang Stainless Steel looks quite suboptimal from a dividend investment perspective.

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, Yuen Chang Stainless Steel has 3 warning signs (and 1 which is a bit unpleasant) 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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