Taiwan Hon Chuan Enterprise Co., Ltd. (TWSE:9939) Will Pay A NT$5.35 Dividend In Three Days

Taiwan Hon Chuan Enterprise Co., Ltd. (TWSE:9939) stock is about to trade ex-dividend in three 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 because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Accordingly, Taiwan Hon Chuan Enterprise investors that purchase the stock on or after the 4th of July will not receive the dividend, which will be paid on the 26th of July.

The company's next dividend payment will be NT$5.35 per share, and in the last 12 months, the company paid a total of NT$5.35 per share. Calculating the last year's worth of payments shows that Taiwan Hon Chuan Enterprise has a trailing yield of 3.1% on the current share price of NT$171.50. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Taiwan Hon Chuan Enterprise

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Taiwan Hon Chuan Enterprise paid out more than half (56%) of its earnings last year, which is a regular payout ratio for most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. The company paid out 98% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

Taiwan Hon Chuan Enterprise paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Taiwan Hon Chuan Enterprise to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

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. It's encouraging to see Taiwan Hon Chuan Enterprise has grown its earnings rapidly, up 21% a year 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. Taiwan Hon Chuan Enterprise has delivered an average of 7.9% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

The Bottom Line

Should investors buy Taiwan Hon Chuan Enterprise for the upcoming dividend? It's good to see that earnings per share are growing and that the company's payout ratio is within a normal range for most businesses. However we're somewhat concerned that it paid out 98% of its cashflow, which is uncomfortably high. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Taiwan Hon Chuan Enterprise's dividend merits.

So if you want to do more digging on Taiwan Hon Chuan Enterprise, you'll find it worthwhile knowing the risks that this stock faces. In terms of investment risks, we've identified 2 warning signs with Taiwan Hon Chuan Enterprise and understanding them should be part of your investment process.

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.

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