We Wouldn't Be Too Quick To Buy Taiwan Steel Union Co., Ltd. (TWSE:6581) Before It Goes Ex-Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Taiwan Steel Union Co., Ltd. (TWSE:6581) is about to trade ex-dividend in the next 3 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Accordingly, Taiwan Steel Union investors that purchase the stock on or after the 28th of March will not receive the dividend, which will be paid on the 26th of April.

The company's next dividend payment will be NT$4.30 per share. Last year, in total, the company distributed NT$4.30 to shareholders. Based on the last year's worth of payments, Taiwan Steel Union stock has a trailing yield of around 4.7% on the current share price of NT$92.40. If you buy this business for its dividend, you should have an idea of whether Taiwan Steel Union's dividend is reliable and sustainable. As a result, readers should always check whether Taiwan Steel Union has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Taiwan Steel Union

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year, Taiwan Steel Union paid out 95% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. A useful secondary check can be to evaluate whether Taiwan Steel Union generated enough free cash flow to afford its dividend. Taiwan Steel Union paid out more free cash flow than it generated - 156%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Cash is slightly more important than profit from a dividend perspective, but given Taiwan Steel Union's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

Click here to see how much of its profit Taiwan Steel Union 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. Readers will understand then, why we're concerned to see Taiwan Steel Union's earnings per share have dropped 8.6% a year over 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. In the past seven years, Taiwan Steel Union has increased its dividend at approximately 3.4% a year on average. 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 Steel Union is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

Is Taiwan Steel Union worth buying for its dividend? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (95%) and cash flow as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. It's not that we think Taiwan Steel Union is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Taiwan Steel Union and want to know more, you'll find it very useful to know what risks this stock faces. To help with this, we've discovered 2 warning signs for Taiwan Steel Union (1 is a bit unpleasant!) that you ought to be aware of before buying the 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.

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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.