Dividend paying stocks like Viking Tech Corporation (GTSM:3624) 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 your dividends, it’s important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you’ll find our analysis useful.
With Viking Tech yielding 4.0% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. We’d guess that plenty of investors have purchased it for the income. Some simple analysis can reduce the risk of holding Viking Tech for its dividend, and we’ll focus on the most important aspects below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. In the last year, Viking Tech paid out 67% of its profit as dividends. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Unfortunately, while Viking 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, Viking Tech investors may not have much to worry about in the near term from a dividend perspective.
Consider getting our latest analysis on Viking Tech’s financial position here.
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. Viking Tech has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut on at least one occasion historically. During the past ten-year period, the first annual payment was NT$1.00 in 2010, compared to NT$1.20 last year. This works out to be a compound annual growth rate (CAGR) of approximately 1.8% a year over that time. The dividends haven’t grown at precisely 1.8% every year, but this is a useful way to average out the historical rate of growth.
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 see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there’s a good chance of bigger dividends in future? In the last five years, Viking Tech’s earnings per share have shrunk at approximately 2.1% per annum. A modest decline in earnings per share is not great to see, but it doesn’t automatically make a dividend unsustainable. Still, we’d vastly prefer to see EPS growth when researching dividend stocks.
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. First, we think Viking Tech has an acceptable payout ratio, although its dividend was not well covered by cashflow. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. Using these criteria, Viking Tech looks quite suboptimal from a dividend investment perspective.
Now, if you want to look closer, it would be worth checking out our free research on Viking Tech management tenure, salary, and performance.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned.
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