Hsin Kuang Steel's (TWSE:2031) Shareholders Will Receive A Bigger Dividend Than Last Year

Hsin Kuang Steel Company Limited (TWSE:2031) has announced that it will be increasing its dividend from last year's comparable payment on the 1st of August to NT$3.00. The payment will take the dividend yield to 4.6%, which is in line with the average for the industry.

See our latest analysis for Hsin Kuang Steel

Hsin Kuang Steel's Earnings Easily Cover The Distributions

We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Prior to this announcement, Hsin Kuang Steel's dividend was only 49% of earnings, however it was paying out 118% of free cash flows. This signals that the company is more focused on returning cash flow to shareholders, but it could mean that the dividend is exposed to cuts in the future.

Over the next year, EPS is forecast to fall by 3.6%. Assuming the dividend continues along recent trends, we believe the payout ratio could be 57%, which we are pretty comfortable with and we think is feasible on an earnings basis.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2014, the dividend has gone from NT$0.50 total annually to NT$3.00. This works out to be a compound annual growth rate (CAGR) of approximately 20% a year over that time. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.

The Dividend Looks Likely To Grow

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. We are encouraged to see that Hsin Kuang Steel has grown earnings per share at 59% per year over the past five years. The company's earnings per share has grown rapidly in recent years, and it has a good balance between reinvesting and paying dividends to shareholders, so we think that Hsin Kuang Steel could prove to be a strong dividend payer.

Our Thoughts On Hsin Kuang Steel's Dividend

Overall, we always like to see the dividend being raised, but we don't think Hsin Kuang Steel will make a great income stock. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. Overall, we don't think this company has the makings of a good income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've identified 3 warning signs for Hsin Kuang Steel (2 are a bit unpleasant!) that you should be aware of before investing. Is Hsin Kuang Steel not quite the opportunity you were looking for? Why not check out our selection of top 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.

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