Is Ampoc Far-East Co., Ltd. (TPE:2493) A Good Dividend Stock?

Dividend paying stocks like Ampoc Far-East Co., Ltd. (TPE:2493) 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. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

In this case, Ampoc Far-East likely looks attractive to investors, given its 7.3% dividend yield and a payment history of over ten years. We'd guess that plenty of investors have purchased it for the income. There are a few simple ways to reduce the risks of buying Ampoc Far-East for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Ampoc Far-East!

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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 100% of Ampoc Far-East's profits were paid out as dividends in the last 12 months. This is quite a high payout ratio that suggests the dividend is not well covered by earnings.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Ampoc Far-East paid out 74% of its cash flow as dividends last year, which is within a reasonable range for the average corporation. It's good to see that while Ampoc Far-East's dividends were not well covered by profits, at least they are affordable from a free cash flow perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

While the above analysis focuses on dividends relative to a company's earnings, we do note Ampoc Far-East'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 Ampoc Far-East'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 Ampoc Far-East'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$1.5 in 2011, compared to NT$2.5 last year. Dividends per share have grown at approximately 5.2% per year over this time. Ampoc Far-East's dividend payments have fluctuated, so it hasn't grown 5.2% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Ampoc Far-East 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 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. It's not great to see that Ampoc Far-East's have fallen at approximately 2.2% over the past five years. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.

Conclusion

To summarise, shareholders should always check that Ampoc Far-East'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 its high payout ratio, although at least the dividend was covered by free cash flow. Earnings per share are down, and Ampoc Far-East's dividend has been cut at least once in the past, which is disappointing. Using these criteria, Ampoc Far-East looks quite suboptimal from a dividend investment perspective.

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 2 warning signs for Ampoc Far-East (1 is concerning!) that you should be aware of before investing.

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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