Does It Make Sense To Buy Sentronic International Corp. (GTSM:3232) For Its Yield?

Dividend paying stocks like Sentronic International Corp. (GTSM:3232) 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. 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 Sentronic International'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. 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 Sentronic International!

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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, Sentronic International paid out 66% of its profit as dividends. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Last year, Sentronic International paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

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

We update our data on Sentronic International every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Sentronic International has been paying a dividend for the past seven years. 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 seven-year period, the first annual payment was NT$0.4 in 2014, compared to NT$0.3 last year. This works out to be a decline of approximately 4.0% per year over that time. Sentronic International's dividend has been cut sharply at least once, so it hasn't fallen by 4.0% every year, but this is a decent approximation of the long term change.

We struggle to make a case for buying Sentronic International for its dividend, given that payments have shrunk over the past seven years.

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. Over the past five years, it looks as though Sentronic International's EPS have declined at around 17% 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 Sentronic International's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think Sentronic International has an acceptable payout ratio, although its dividend was not well covered by cashflow. Earnings per share are down, and Sentronic International's dividend has been cut at least once in the past, which is disappointing. There are a few too many issues for us to get comfortable with Sentronic International from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 2 warning signs for Sentronic International that investors need to be conscious of moving forward.

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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