Cathay Chemical Works Inc. (TWSE:1713) Is About To Go Ex-Dividend, And It Pays A 2.5% Yield

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Cathay Chemical Works Inc. (TWSE:1713) is about to trade ex-dividend in the next 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Meaning, you will need to purchase Cathay Chemical Works' shares before the 5th of July to receive the dividend, which will be paid on the 30th of July.

The company's next dividend payment will be NT$1.40 per share, and in the last 12 months, the company paid a total of NT$1.40 per share. Last year's total dividend payments show that Cathay Chemical Works has a trailing yield of 2.5% on the current share price of NT$55.50. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Cathay Chemical Works

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Cathay Chemical Works paid out 66% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Cathay Chemical Works generated enough free cash flow to afford its dividend. It paid out an unsustainably high 205% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how Cathay Chemical Works intends to continue funding this dividend, or if it could be forced to cut the payment.

While Cathay Chemical Works's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Cathay Chemical Works's ability to maintain its dividend.

Click here to see how much of its profit Cathay Chemical Works paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see Cathay Chemical Works's earnings have been skyrocketing, up 23% per annum for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Cathay Chemical Works has delivered 11% dividend growth per year on average over the past 10 years. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

Final Takeaway

From a dividend perspective, should investors buy or avoid Cathay Chemical Works? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note Cathay Chemical Works paid out a much higher percentage of its free cash flow, which makes us uncomfortable. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.

With that being said, if dividends aren't your biggest concern with Cathay Chemical Works, you should know about the other risks facing this business. To help with this, we've discovered 1 warning sign for Cathay Chemical Works that you should be aware of before investing in their shares.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com