Why It Might Not Make Sense To Buy Nang Kuang Pharmaceutical Co., Ltd. (TWSE:1752) For Its Upcoming Dividend

Nang Kuang Pharmaceutical Co., Ltd. (TWSE:1752) stock is about to trade ex-dividend in three days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. 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. Therefore, if you purchase Nang Kuang Pharmaceutical's shares on or after the 4th of July, you won't be eligible to receive the dividend, when it is paid on the 31st of July.

The company's upcoming dividend is NT$2.00 a share, following on from the last 12 months, when the company distributed a total of NT$2.00 per share to shareholders. Based on the last year's worth of payments, Nang Kuang Pharmaceutical has a trailing yield of 3.7% on the current stock price of NT$54.30. 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.

Check out our latest analysis for Nang Kuang Pharmaceutical

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. Nang Kuang Pharmaceutical distributed an unsustainably high 127% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether Nang Kuang Pharmaceutical generated enough free cash flow to afford its dividend. It paid out an unsustainably high 320% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how Nang Kuang Pharmaceutical intends to continue funding this dividend, or if it could be forced to cut the payment.

As Nang Kuang Pharmaceutical's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see how much of its profit Nang Kuang Pharmaceutical paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Nang Kuang Pharmaceutical, with earnings per share up 9.5% on average over the last five years. Earnings per share have been growing comfortably, although unfortunately the company is paying out more of its profits than we're comfortable with over the long term.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Nang Kuang Pharmaceutical has increased its dividend at approximately 22% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

The Bottom Line

Is Nang Kuang Pharmaceutical an attractive dividend stock, or better left on the shelf? The dividends are not well covered by either income or free cash flow, although at least earnings per share are slowly increasing. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Nang Kuang Pharmaceutical.

So if you're still interested in Nang Kuang Pharmaceutical despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For instance, we've identified 3 warning signs for Nang Kuang Pharmaceutical (1 shouldn't be ignored) you should be aware of.

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