Consider This Before Buying All Ring Tech Co., Ltd. (GTSM:6187) For The 3.0% Dividend

Is All Ring Tech Co., Ltd. (GTSM:6187) 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.

A slim 3.0% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, All Ring Tech could have potential. The company also bought back stock during the year, equivalent to approximately 0.8% of the company's market capitalisation at the time. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

Click the interactive chart for our full dividend analysis

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. All Ring Tech paid out 100% of its profit as dividends, over the trailing twelve month period. Its payout ratio is quite high, and the dividend is not well covered by earnings. If earnings are growing or the company has a large cash balance, this might be sustainable - still, we think it is a concern.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. All Ring Tech paid out 57% of its free cash flow last year, which is acceptable, but is starting to limit the amount of earnings that can be reinvested into the business. It's good to see that while All Ring Tech's dividends were not well covered by profits, at least they are affordable from a free cash flow perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

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

Remember, you can always get a snapshot of All Ring Tech's latest financial position, by checking our visualisation of its financial health.

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. All Ring 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 10-year period, the first annual payment was NT$1.0 in 2011, compared to NT$3.0 last year. This works out to be a compound annual growth rate (CAGR) of approximately 12% a year over that time. The dividends haven't grown at precisely 12% every year, but this is a useful way to average out the historical rate of growth.

All Ring Tech has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, but it might be worth considering if the business has turned a corner.

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. All Ring Tech's EPS are effectively flat over the past five years. Over the long term, steady earnings per share is a risk as the value of the dividends can be reduced by inflation. This level of earnings growth is low, and the company is paying out 100% of its profit. As they say in finance, 'past performance is not indicative of future performance', but we are not confident a company with limited earnings growth and a high payout ratio will be a star dividend-payer over the next decade.

Conclusion

To summarise, shareholders should always check that All Ring Tech'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 not keen on the fact that All Ring Tech paid out such a high percentage of its income, although its cashflow is in better shape. Second, earnings have been essentially flat, and its history of dividend payments is chequered - having cut its dividend at least once in the past. In summary, All Ring Tech has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 2 warning signs for All Ring Tech (of which 1 is 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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