Stock Analysis

Would Winstek Semiconductor Co., Ltd. (GTSM:3265) Be Valuable To Income Investors?

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TPEX:3265
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Dividend paying stocks like Winstek Semiconductor Co., Ltd. (GTSM:3265) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

In this case, Winstek Semiconductor likely looks attractive to investors, given its 4.9% dividend yield and a payment history of over ten years. We'd guess that plenty of investors have purchased it for the income. 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

historic-dividend
GTSM:3265 Historic Dividend April 2nd 2021

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 97% of Winstek Semiconductor's profits were paid out as dividends in the last 12 months. With a payout ratio this high, we'd say its dividend is not well covered by earnings. This may be fine if earnings are growing, but it might not take much of a downturn for the dividend to come under pressure.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Winstek Semiconductor's cash payout ratio in the last year was 28%, 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 Winstek Semiconductor'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 Winstek Semiconductor'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. For the purpose of this article, we only scrutinise the last decade of Winstek Semiconductor's dividend payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was NT$0.8 in 2011, compared to NT$1.5 last year. This works out to be a compound annual growth rate (CAGR) of approximately 6.0% a year over that 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.

It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Winstek Semiconductor might have put its house in order since then, but we remain cautious.

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? It's good to see Winstek Semiconductor has been growing its earnings per share at 16% a year over the past five years. While EPS are growing rapidly, Winstek Semiconductor paid out a very high 97% of its income as dividends. If earnings continue to grow, this dividend may be sustainable, but we think a payout this high definitely bears watching.

Conclusion

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 its high payout ratio, although at least the dividend was covered by free cash flow. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Winstek Semiconductor out there.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 2 warning signs for Winstek Semiconductor that investors should know about before committing capital to this stock.

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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About TPEX:3265

Winstek Semiconductor

Winstek Semiconductor Co., Ltd., together with its subsidiaries, engages in the research, development, and testing of integrated circuits in Taiwan.

Flawless balance sheet and good value.

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