Are Dividend Investors Making A Mistake With The Eslite Spectrum Corporation (GTSM:2926)?

Is The Eslite Spectrum Corporation (GTSM:2926) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

With a goodly-sized dividend yield despite a relatively short payment history, investors might be wondering if Eslite Spectrum is a new dividend aristocrat in the making. It sure looks interesting on these metrics - but there's always more to the story. Some simple analysis can reduce the risk of holding Eslite Spectrum for its dividend, and we'll focus on the most important aspects below.

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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. 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. Looking at the data, we can see that 286% of Eslite Spectrum's profits were paid out as dividends in the last 12 months. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Eslite Spectrum paid out 23% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable. It's good to see that while Eslite Spectrum's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

While the above analysis focuses on dividends relative to a company's earnings, we do note Eslite Spectrum'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 Eslite Spectrum's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. The first recorded dividend for Eslite Spectrum, 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$4.6 in 2012, compared to NT$4.2 last year. The dividend has shrunk at a rate of less than 1% a year over this period.

A shrinking dividend over a nine-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Eslite Spectrum's EPS have fallen by approximately 30% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Eslite Spectrum's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Eslite Spectrum'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 Eslite Spectrum paid out such a high percentage of its income, although its cashflow is in better shape. Earnings per share are down, and Eslite Spectrum's dividend has been cut at least once in the past, which is disappointing. In summary, Eslite Spectrum has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.

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. Case in point: We've spotted 3 warning signs for Eslite Spectrum (of which 1 is a bit concerning!) you should know about.

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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