Something To Consider Before Buying Eclat Forever Machinery Co., Ltd. (GTSM:3485) For The 4.4% Dividend

Dividend paying stocks like Eclat Forever Machinery Co., Ltd. (GTSM:3485) 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 stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

With a eight-year payment history and a 4.4% yield, many investors probably find Eclat Forever Machinery intriguing. It sure looks interesting on these metrics - but there's always more to the story. The company also bought back stock during the year, equivalent to approximately 1.4% of the company's market capitalisation at the time. Remember though, due to the recent spike in its share price, Eclat Forever Machinery's yield will look lower, even though the market may now be factoring in an improvement in its long-term prospects. There are a few simple ways to reduce the risks of buying Eclat Forever Machinery for its dividend, and we'll go through these below.

Click the interactive chart for our full dividend analysis

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 28,549% of Eclat Forever Machinery'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.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Last year, Eclat Forever Machinery paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

With a strong net cash balance, Eclat Forever Machinery investors may not have much to worry about in the near term from a dividend perspective.

Remember, you can always get a snapshot of Eclat Forever Machinery'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. Looking at the last decade of data, we can see that Eclat Forever Machinery paid its first dividend at least eight 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 eight-year period, the first annual payment was NT$3.2 in 2012, compared to NT$1.5 last year. The dividend has shrunk at around 8.9% a year during that period. Eclat Forever Machinery's dividend hasn't shrunk linearly at 8.9% per annum, but the CAGR is a useful estimate of the historical rate of change.

A shrinking dividend over a eight-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, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. Over the past five years, it looks as though Eclat Forever Machinery's EPS have declined at around 65% a year. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

Conclusion

To summarise, shareholders should always check that Eclat Forever Machinery'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 a bit uncomfortable with Eclat Forever Machinery paying out a high percentage of both its cashflow and earnings. Earnings per share are down, and Eclat Forever Machinery's dividend has been cut at least once in the past, which is disappointing. In this analysis, Eclat Forever Machinery doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 5 warning signs for Eclat Forever Machinery that investors should take into consideration.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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