Should Netronix, Inc. (GTSM:6143) Be Part Of Your Income Portfolio?

Is Netronix, Inc. (GTSM:6143) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

With Netronix yielding 4.9% 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. The company also bought back stock during the year, equivalent to approximately 1.0% of the company's market capitalisation at the time. That said, the recent jump in the share price will make Netronix's dividend yield look smaller, even though the company prospects could be improving. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Explore this interactive chart for our latest analysis on Netronix!

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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Netronix paid out 96% of its profit as dividends, over the trailing twelve month period. With a payout ratio this high, we'd say its dividend is not well covered by earnings. This may be fine if earnings are growing, but it might not take much of a downturn for the dividend to come under pressure.

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

Consider getting our latest analysis on Netronix's financial position here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Netronix has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of 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$1.3 in 2011, compared to NT$2.8 last year. Dividends per share have grown at approximately 8.0% per year over this time. Netronix's dividend payments have fluctuated, so it hasn't grown 8.0% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

Dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.

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 Netronix's EPS have declined at around 13% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Netronix's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Netronix's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're a bit uncomfortable with Netronix paying out a high percentage of both its cashflow and earnings. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. There are a few too many issues for us to get comfortable with Netronix 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. 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 5 warning signs for Netronix (of which 3 are potentially serious!) you should know about.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding 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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