Should You Buy Foxconn Technology Co., Ltd. (TPE:2354) For Its Dividend?

Is Foxconn Technology Co., Ltd. (TPE:2354) 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 high yield and a long history of paying dividends is an appealing combination for Foxconn Technology. We'd guess that plenty of investors have purchased it for the income. There are a few simple ways to reduce the risks of buying Foxconn Technology for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Foxconn Technology!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Foxconn Technology paid out 65% of its profit as dividends, over the trailing twelve month period. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. With a cash payout ratio of 121%, Foxconn Technology's dividend payments are poorly covered by cash flow. Foxconn Technology paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough free cash flow to cover the dividend. Cash is king, as they say, and were Foxconn Technology to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

Remember, you can always get a snapshot of Foxconn Technology'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. Foxconn Technology has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of 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$0.6 in 2011, compared to NT$2.5 last year. This works out to be a compound annual growth rate (CAGR) of approximately 16% a year over that time. The dividends haven't grown at precisely 16% every year, but this is a useful way to average out the historical rate of growth.

Foxconn Technology 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

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. Foxconn Technology's EPS have fallen by approximately 17% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Foxconn Technology's earnings per share, which support the dividend, have been anything but stable.

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. First, we think Foxconn Technology has an acceptable payout ratio, although its dividend was not well covered by cashflow. Earnings per share are down, and Foxconn Technology's dividend has been cut at least once in the past, which is disappointing. There are a few too many issues for us to get comfortable with Foxconn Technology 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. Taking the debate a bit further, we've identified 2 warning signs for Foxconn Technology that investors need to be conscious of moving forward.

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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