Formosa Sumco Technology's (TWSE:3532) Dividend Will Be Reduced To NT$5.00

Formosa Sumco Technology Corporation (TWSE:3532) has announced that on 23rd of August, it will be paying a dividend ofNT$5.00, which a reduction from last year's comparable dividend. The dividend yield will be in the average range for the industry at 2.9%.

View our latest analysis for Formosa Sumco Technology

Formosa Sumco Technology's Payment Has Solid Earnings Coverage

We aren't too impressed by dividend yields unless they can be sustained over time. Before making this announcement, Formosa Sumco Technology was earning enough to cover the dividend, but it wasn't generating any free cash flows. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.

If the company can't turn things around, EPS could fall by 11.7% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could reach 84%, which is definitely on the higher side.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. The dividend has gone from an annual total of NT$0.60 in 2014 to the most recent total annual payment of NT$5.00. This implies that the company grew its distributions at a yearly rate of about 24% over that duration. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.

The Dividend Has Limited Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Earnings per share has been sinking by 12% over the last five years. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough.

Formosa Sumco Technology's Dividend Doesn't Look Sustainable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. While Formosa Sumco Technology is earning enough to cover the payments, the cash flows are lacking. We would probably look elsewhere for an income investment.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Case in point: We've spotted 2 warning signs for Formosa Sumco Technology (of which 1 shouldn't be ignored!) you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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