Transcend Information (TWSE:2451) Has Announced That Its Dividend Will Be Reduced To NT$4.99

Transcend Information, Inc. (TWSE:2451) is reducing its dividend from last year's comparable payment to NT$4.99 on the 2nd of August. However, the dividend yield of 3.8% is still a decent boost to shareholder returns.

While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Investors will be pleased to see that Transcend Information's stock price has increased by 49% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.

See our latest analysis for Transcend Information

Transcend Information's Earnings Easily Cover The Distributions

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Transcend Information's dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 522% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.

EPS is set to grow by 5.4% over the next year if recent trends continue. Assuming the dividend continues along recent trends, our estimates say the payout ratio could reach 76%, which is definitely on the higher side, but we wouldn't necessarily say this is unsustainable.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. The dividend has gone from an annual total of NT$6.70 in 2014 to the most recent total annual payment of NT$5.00. This works out to be a decline of approximately 2.9% per year over that time. A company that decreases its dividend over time generally isn't what we are looking for.

The Dividend Has Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Transcend Information has impressed us by growing EPS at 5.4% per year over the past five years. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.

Transcend Information's Dividend Doesn't Look Sustainable

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. The track record isn't great, and the payments are a bit high to be considered sustainable. We would be a touch cautious of relying on this stock primarily for the dividend income.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Transcend Information has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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