Could Shin Foong Specialty and Applied Materials Co., Ltd. (TPE:6582) Have The Makings Of Another Dividend Aristocrat?

Dividend paying stocks like Shin Foong Specialty and Applied Materials Co., Ltd. (TPE:6582) 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. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

In this case, Shin Foong Specialty and Applied Materials likely looks attractive to dividend investors, given its 3.3% dividend yield and four-year payment history. It sure looks interesting on these metrics - but there's always more to the story. Remember though, due to the recent spike in its share price, Shin Foong Specialty and Applied Materials's yield will look lower, even though the market may now be factoring in an improvement in its long-term prospects. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Explore this interactive chart for our latest analysis on Shin Foong Specialty and Applied Materials!

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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 59% of Shin Foong Specialty and Applied Materials' profits were paid out as dividends in the last 12 months. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Shin Foong Specialty and Applied Materials' cash payout ratio last year was 21%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It's positive to see that Shin Foong Specialty and Applied Materials' 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.

With a strong net cash balance, Shin Foong Specialty and Applied Materials investors may not have much to worry about in the near term from a dividend perspective.

Remember, you can always get a snapshot of Shin Foong Specialty and Applied Materials' 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. Looking at the data, we can see that Shin Foong Specialty and Applied Materials has been paying a dividend for the past four years. The dividend has not fluctuated much, but with a relatively short payment history, we can't be sure this is sustainable across a full market cycle. During the past four-year period, the first annual payment was NT$4.0 in 2017, compared to NT$10.0 last year. This works out to be a compound annual growth rate (CAGR) of approximately 26% a year over that time.

Shin Foong Specialty and Applied Materials has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Shin Foong Specialty and Applied Materials has grown its earnings per share at 16% per annum over the past five years. Shin Foong Specialty and Applied Materials' earnings per share have grown rapidly in recent years, although more than half of its profits are being paid out as dividends, which makes us wonder if the company has a limited number of reinvestment opportunities in its business.

Conclusion

To summarise, shareholders should always check that Shin Foong Specialty and Applied Materials' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Shin Foong Specialty and Applied Materials' payout ratios are within a normal range for the average corporation, and we like that its cashflow was stronger than reported profits. We were also glad to see it growing earnings, although its dividend history is not as long as we'd like. Overall we think Shin Foong Specialty and Applied Materials is an interesting dividend stock, although it could be better.

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. For example, we've picked out 2 warning signs for Shin Foong Specialty and Applied Materials that investors should know about before committing capital to this stock.

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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