Tread With Caution Around Sunflex Tech Co., Ltd.'s (GTSM:3390) 3.4% Dividend Yield

Today we'll take a closer look at Sunflex Tech Co., Ltd. (GTSM:3390) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. 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.

A high yield and a long history of paying dividends is an appealing combination for Sunflex Tech. We'd guess that plenty of investors have purchased it for the income. Some simple research can reduce the risk of buying Sunflex Tech for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Sunflex Tech!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. While Sunflex Tech pays a dividend, it reported a loss over the last year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

Unfortunately, while Sunflex Tech pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.

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

Consider getting our latest analysis on Sunflex Tech's financial position 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. For the purpose of this article, we only scrutinise the last decade of Sunflex Tech'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$0.7 in 2011, compared to NT$0.5 last year. The dividend has shrunk at around 2.9% a year during that period. Sunflex Tech's dividend has been cut sharply at least once, so it hasn't fallen by 2.9% every year, but this is a decent approximation of the long term change.

We struggle to make a case for buying Sunflex Tech for its dividend, given that payments have shrunk over the past 10 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 Sunflex Tech's EPS have declined at around 36% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Sunflex Tech's earnings per share, which support the dividend, have been anything but stable.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. It's a concern to see that the company paid a dividend despite reporting a loss, and the dividend was also not well covered by free cash flow. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In this analysis, Sunflex Tech 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.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, Sunflex Tech has 4 warning signs (and 2 which can't be ignored) we think you should know about.

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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