Read This Before Buying Chi Sheng Pharma & Biotech Co., Ltd (GTSM:4111) For Its Dividend

Could Chi Sheng Pharma & Biotech Co., Ltd (GTSM:4111) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the 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.

With a nine-year payment history and a 4.3% yield, many investors probably find Chi Sheng Pharma & Biotech intriguing. It sure looks interesting on these metrics - but there's always more to the story. There are a few simple ways to reduce the risks of buying Chi Sheng Pharma & Biotech for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Chi Sheng Pharma & Biotech!

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. In the last year, Chi Sheng Pharma & Biotech paid out 96% of its profit as dividends. This is quite a high payout ratio that suggests the dividend is not well covered by earnings.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Chi Sheng Pharma & Biotech's cash payout ratio in the last year was 47%, which suggests dividends were well covered by cash generated by the business. While the dividend was not well covered by profits, at least they were covered by free cash flow. Even so, if the company were to continue paying out almost all of its profits, we'd be concerned about whether the dividend is sustainable in a downturn.

While the above analysis focuses on dividends relative to a company's earnings, we do note Chi Sheng Pharma & Biotech'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 Chi Sheng Pharma & Biotech'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. The first recorded dividend for Chi Sheng Pharma & Biotech, in the last decade, was nine years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we're cautious about the consistency of its dividend across a full economic cycle. During the past nine-year period, the first annual payment was NT$0.3 in 2012, compared to NT$1.0 last year. Dividends per share have grown at approximately 14% per year over this time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

Chi Sheng Pharma & Biotech 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? Chi Sheng Pharma & Biotech has grown its earnings per share at 8.7% per annum over the past five years. Although per-share earnings are growing at a credible rate, virtually all of the income is being paid out as dividends to shareholders. This is okay, but may limit growth in the company's future dividend payments.

Conclusion

To summarise, shareholders should always check that Chi Sheng Pharma & Biotech's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're not keen on the fact that Chi Sheng Pharma & Biotech paid out such a high percentage of its income, although its cashflow is in better shape. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. Ultimately, Chi Sheng Pharma & Biotech comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 2 warning signs for Chi Sheng Pharma & Biotech that investors should know about before committing capital to this stock.

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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