Today we’ll take a closer look at Art Emperor Technology & Culture Co., Ltd (GTSM:6650) 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. 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.
In this case, Art Emperor Technology & Culture pays a decent-sized 5.3% dividend yield, and has been distributing cash to shareholders for the past two years. A 5.3% yield does look good. Could the short payment history hint at future dividend growth? Some simple analysis can offer a lot of insights when buying a company for its dividend, and we’ll go through this below.
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. In the last year, Art Emperor Technology & Culture paid out 143% of its profit as dividends. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Unfortunately, while Art Emperor Technology & Culture pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it’s not ideal from a dividend perspective.
With a strong net cash balance, Art Emperor Technology & Culture investors may not have much to worry about in the near term from a dividend perspective.
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 company has been paying a stable dividend for a few years now, but we’d like to see more evidence of consistency over a longer period. During the past two-year period, the first annual payment was NT$1.25 in 2018, compared to NT$2.00 last year. This works out to be a compound annual growth rate (CAGR) of approximately 26% a year over that time.
We’re not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Art Emperor Technology & Culture has grown its earnings per share at 90% per annum over the past five years. Earnings per share have been growing very rapidly, although the company is also paying out virtually all of its profit in dividends. While EPS could grow fast enough to make the dividend sustainable, in this type of situation, we’d want to pay extra attention to any fragilities in the company’s balance sheet.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We’re a bit uncomfortable with Art Emperor Technology & Culture paying out a high percentage of both its cashflow and earnings. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we’d like. In summary, Art Emperor Technology & Culture 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.
See if management have their own wealth at stake, by checking insider shareholdings in Art Emperor Technology & Culture 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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