Is Sincere Security Co. Ltd. (GTSM:6721) A Smart Pick For Income Investors?

Today we'll take a closer look at Sincere Security Co. Ltd. (GTSM:6721) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

Sincere Security yields a solid 3.5%, although it has only been paying for two years. A 3.5% yield does look good. Could the short payment history hint at future dividend growth? Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Click the interactive chart for our full dividend analysis

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. In the last year, Sincere Security paid out 56% of its profit as dividends. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.

While the above analysis focuses on dividends relative to a company's earnings, we do note Sincere Security'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 Sincere Security'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. This company's dividend has been unstable, and with a relatively short history, we think it's a little soon to draw strong conclusions about its long term dividend potential. During the past two-year period, the first annual payment was NT$3.0 in 2019, compared to NT$2.4 last year. This works out to a decline of approximately 20% over that time.

We struggle to make a case for buying Sincere Security for its dividend, given that payments have shrunk over the past two years.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. It's good to see Sincere Security has been growing its earnings per share at 13% a year over the past five years. Sincere Security's earnings per share have grown rapidly in recent years, although more than half of its profits are being paid out as dividends, which makes us wonder if the company has a limited number of reinvestment opportunities in its business.

Conclusion

To summarise, shareholders should always check that Sincere Security's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Sincere Security's payout ratio is within an average range for most market participants. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. Sincere Security might not be a bad business, but it doesn't show all of the characteristics we look for in a dividend stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 3 warning signs for Sincere Security that investors need to be conscious of moving forward.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 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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