Should You Buy Taiwan Alpha Electronic Co., Ltd. (GTSM:6204) For Its 1.7% Dividend?

Is Taiwan Alpha Electronic Co., Ltd. (GTSM:6204) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

A slim 1.7% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Taiwan Alpha Electronic could have potential. During the year, the company also conducted a buyback equivalent to around 4.7% of its market capitalisation. Remember though, due to the recent spike in its share price, Taiwan Alpha Electronic's yield will look lower, even though the market may now be factoring in an improvement in its long-term prospects. Some simple research can reduce the risk of buying Taiwan Alpha Electronic for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Taiwan Alpha Electronic!

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. Taiwan Alpha Electronic paid out 133% of its profit as dividends, over the trailing twelve month period. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Taiwan Alpha Electronic paid out 54% of its cash flow as dividends last year, which is within a reasonable range for the average corporation. It's good to see that while Taiwan Alpha Electronic's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

Consider getting our latest analysis on Taiwan Alpha Electronic's financial position here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Taiwan Alpha Electronic 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$3.1 in 2011, compared to NT$2.0 last year. The dividend has shrunk at around 4.4% a year during that period. Taiwan Alpha Electronic's dividend has been cut sharply at least once, so it hasn't fallen by 4.4% every year, but this is a decent approximation of the long term change.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

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 Taiwan Alpha Electronic's EPS have declined at around 9.5% a year. 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.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We're not keen on the fact that Taiwan Alpha Electronic paid out such a high percentage of its income, although its cashflow is in better shape. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In this analysis, Taiwan Alpha Electronic 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.

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. To that end, Taiwan Alpha Electronic has 3 warning signs (and 1 which doesn't sit too well with us) we think 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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