Factors Income Investors Should Consider Before Adding Samebest Co., Ltd. (GTSM:8489) To Their Portfolio

By
Simply Wall St
Published
November 18, 2020
GTSM:8489

Dividend paying stocks like Samebest Co., Ltd. (GTSM:8489) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

Investors might not know much about Samebest's dividend prospects, even though it has been paying dividends for the last five years and offers a 2.9% yield. A 2.9% yield is not inspiring, but the longer payment history has some appeal. Some simple research can reduce the risk of buying Samebest for its dividend - read on to learn more.

Click the interactive chart for our full dividend analysis

historic-dividend
GTSM:8489 Historic Dividend November 19th 2020

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Samebest paid out 119% of its profit as dividends, over the trailing twelve month period. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Samebest paid out 101% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. Cash is slightly more important than profit from a dividend perspective, but given Samebest's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

While the above analysis focuses on dividends relative to a company's earnings, we do note Samebest's strong net cash position, which will let it pay larger dividends for a time, should it choose.

Remember, you can always get a snapshot of Samebest's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Looking at the data, we can see that Samebest has been paying a dividend for the past five years. During the past five-year period, the first annual payment was NT$0.3 in 2015, compared to NT$1.6 last year. Dividends per share have grown at approximately 44% per year over this time. The dividends haven't grown at precisely 44% every year, but this is a useful way to average out the historical rate of growth.

Samebest has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, but it might be worth considering if the business has turned a corner.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Samebest has grown its earnings per share at 13% per annum over the past five years. With a payout ratio of 119%, Samebest is paying out substantially more than it earned in dividends. This is a risky practice.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We're a bit uncomfortable with Samebest paying out a high percentage of both its cashflow and earnings. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. With this information in mind, we think Samebest may not be an ideal dividend stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 3 warning signs for Samebest that investors need to be conscious of moving forward.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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This article by Simply Wall St is general in nature. 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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