Connection Technology Systems Inc. (GTSM:3672) Investors Should Think About This Before Buying It For Its Dividend

Is Connection Technology Systems Inc. (GTSM:3672) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.

Investors might not know much about Connection Technology Systems's dividend prospects, even though it has been paying dividends for the last seven years and offers a 1.4% yield. A 1.4% yield is not inspiring, but the longer payment history has some appeal. During the year, the company also conducted a buyback equivalent to around 1.7% of its market capitalisation. There are a few simple ways to reduce the risks of buying Connection Technology Systems for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Connection Technology Systems!

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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Connection Technology Systems paid out 48% of its profit as dividends, over the trailing twelve month period. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Last year, Connection Technology Systems 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 Connection Technology Systems' strong net cash position, which will let it pay larger dividends for a time, should it choose.

Consider getting our latest analysis on Connection Technology Systems' 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. Connection Technology Systems has been paying a dividend for the past seven years. It's good to see that Connection Technology Systems has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past seven-year period, the first annual payment was NT$0.08 in 2014, compared to NT$0.3 last year. Dividends per share have grown at approximately 17% per year over this time. The dividends haven't grown at precisely 17% every year, but this is a useful way to average out the historical rate of growth.

It's not great to see that the payment has been cut in the past. We're generally more wary of companies that have cut their dividend before, as they tend to perform worse in an economic downturn.

Dividend 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. Over the past five years, it looks as though Connection Technology Systems' EPS have declined at around 29% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Connection Technology Systems' 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. Connection Technology Systems has a low payout ratio, which we like, although it paid out virtually all of its generated cash. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. With this information in mind, we think Connection Technology Systems may not be an ideal dividend stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Connection Technology Systems has 3 warning signs (and 2 which are potentially serious) 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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