Investors In Honey Hope Honesty Enterprise Co.,Ltd (GTSM:8043) Should Consider This, First

Is Honey Hope Honesty Enterprise Co.,Ltd (GTSM:8043) 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 the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

A 1.6% yield is nothing to get excited about, but investors probably think the long payment history suggests Honey Hope Honesty EnterpriseLtd has some staying power. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Explore this interactive chart for our latest analysis on Honey Hope Honesty EnterpriseLtd!

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. 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. Although Honey Hope Honesty EnterpriseLtd pays a dividend, it was loss-making during the past year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Honey Hope Honesty EnterpriseLtd paid out 146% of its free cash flow last year, which we think is concerning if cash flows do not improve. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely.

While the above analysis focuses on dividends relative to a company's earnings, we do note Honey Hope Honesty EnterpriseLtd'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 Honey Hope Honesty EnterpriseLtd's latest financial position, by checking our visualisation of its financial health.

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. For the purpose of this article, we only scrutinise the last decade of Honey Hope Honesty EnterpriseLtd's dividend payments. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was NT$0.8 in 2011, compared to NT$0.5 last year. This works out to be a decline of approximately 4.6% per year over that time. Honey Hope Honesty EnterpriseLtd's dividend hasn't shrunk linearly at 4.6% per annum, but the CAGR is a useful estimate of the historical rate of 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. Honey Hope Honesty EnterpriseLtd's EPS are effectively flat over the past five years. Flat earnings per share are acceptable for a time, but over the long term, the purchasing power of the company's dividends could be eroded by inflation.

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. Honey Hope Honesty EnterpriseLtd's dividend is not well covered by free cash flow, plus it paid a dividend while being unprofitable. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. There are a few too many issues for us to get comfortable with Honey Hope Honesty EnterpriseLtd from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

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, Honey Hope Honesty EnterpriseLtd has 2 warning signs (and 1 which shouldn't be ignored) 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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