Should You Buy IntelliEPI Inc. (Cayman) (GTSM:4971) For Its Dividend?

Is IntelliEPI Inc. (Cayman) (GTSM:4971) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.

Investors might not know much about IntelliEPI (Cayman)'s dividend prospects, even though it has been paying dividends for the last seven years and offers a 1.9% yield. A 1.9% yield is not inspiring, but the longer payment history has some appeal. The company also bought back stock during the year, equivalent to approximately 1.5% of the company's market capitalisation at the time. 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.

Explore this interactive chart for our latest analysis on IntelliEPI (Cayman)!

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, 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 116% of IntelliEPI (Cayman)'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.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. IntelliEPI (Cayman) paid out 193% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely. Cash is slightly more important than profit from a dividend perspective, but given IntelliEPI (Cayman)'s payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

While the above analysis focuses on dividends relative to a company's earnings, we do note IntelliEPI (Cayman)'s strong net cash position, which will let it pay larger dividends for a time, should it choose.

Consider getting our latest analysis on IntelliEPI (Cayman)'s financial position here.

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. IntelliEPI (Cayman) has been paying a dividend for the past seven years. It's good to see that IntelliEPI (Cayman) has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past seven-year period, the first annual payment was NT$1.0 in 2014, compared to NT$1.0 last year. Dividend payments have grown at less than 1% a year over this period.

We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments, we don't think this is an attractive combination.

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. IntelliEPI (Cayman)'s EPS have fallen by approximately 28% 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 IntelliEPI (Cayman)'s earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that IntelliEPI (Cayman)'s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. IntelliEPI (Cayman) paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. There are a few too many issues for us to get comfortable with IntelliEPI (Cayman) from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've identified 3 warning signs for IntelliEPI (Cayman) (1 is a bit unpleasant!) that you should be aware of before investing.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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