Do Investors Have Good Reason To Be Wary Of King Core Electronics Inc.'s (TPE:6155) 2.7% Dividend Yield?

Could King Core Electronics Inc. (TPE:6155) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

With a 2.7% yield and a eight-year payment history, investors probably think King Core Electronics looks like a reliable dividend stock. While the yield may not look too great, the relatively long payment history is interesting. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

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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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, King Core Electronics paid out 191% of its profit as dividends. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. King Core Electronics paid out 130% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. 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. Cash is slightly more important than profit from a dividend perspective, but given King Core Electronics' payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

Consider getting our latest analysis on King Core Electronics' 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. The first recorded dividend for King Core Electronics, in the last decade, was eight years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we're cautious about the consistency of its dividend across a full economic cycle. During the past eight-year period, the first annual payment was NT$1.1 in 2013, compared to NT$0.8 last year. This works out to be a decline of approximately 4.8% per year over that time. King Core Electronics' dividend has been cut sharply at least once, so it hasn't fallen by 4.8% every year, but this is a decent approximation of the long term change.

A shrinking dividend over a eight-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

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. King Core Electronics' EPS have fallen by approximately 20% 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 King Core Electronics' earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that King Core Electronics' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. King Core Electronics paid out almost all of its cash flow and profit as dividends, leaving little to reinvest in the business. 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 King Core Electronics from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've identified 5 warning signs for King Core Electronics (2 are a bit unpleasant!) that you should be aware of before investing.

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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