Dividend Investors: Don't Be Too Quick To Buy Taiwan Fertilizer Co., Ltd. (TWSE:1722) For Its Upcoming Dividend

Taiwan Fertilizer Co., Ltd. (TWSE:1722) is about to trade ex-dividend in the next four days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Therefore, if you purchase Taiwan Fertilizer's shares on or after the 27th of August, you won't be eligible to receive the dividend, when it is paid on the 16th of September.

The company's next dividend payment will be NT$2.60 per share, on the back of last year when the company paid a total of NT$2.60 to shareholders. Based on the last year's worth of payments, Taiwan Fertilizer has a trailing yield of 4.1% on the current stock price of NT$63.10. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Taiwan Fertilizer

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Taiwan Fertilizer distributed an unsustainably high 160% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether Taiwan Fertilizer generated enough free cash flow to afford its dividend. Dividends consumed 69% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Taiwan Fertilizer fortunately did generate enough cash to fund its dividend. 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.

Click here to see how much of its profit Taiwan Fertilizer paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by Taiwan Fertilizer's 7.0% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Taiwan Fertilizer has delivered 2.7% dividend growth per year on average over the past 10 years. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Taiwan Fertilizer is already paying out 160% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

Is Taiwan Fertilizer an attractive dividend stock, or better left on the shelf? Earnings per share have been shrinking in recent times. Worse, Taiwan Fertilizer's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Taiwan Fertilizer.

Although, if you're still interested in Taiwan Fertilizer and want to know more, you'll find it very useful to know what risks this stock faces. In terms of investment risks, we've identified 2 warning signs with Taiwan Fertilizer and understanding them should be part of your investment process.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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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.