It Might Not Be A Great Idea To Buy Chunghwa Telecom Co., Ltd. (TWSE:2412) For Its Next Dividend

Readers hoping to buy Chunghwa Telecom Co., Ltd. (TWSE:2412) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase Chunghwa Telecom's shares before the 4th of July in order to be eligible for the dividend, which will be paid on the 8th of August.

The company's next dividend payment will be NT$4.758 per share, on the back of last year when the company paid a total of NT$4.76 to shareholders. Based on the last year's worth of payments, Chunghwa Telecom has a trailing yield of 3.8% on the current stock price of NT$125.50. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Chunghwa Telecom

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Chunghwa Telecom paid out 101% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. A useful secondary check can be to evaluate whether Chunghwa Telecom generated enough free cash flow to afford its dividend. It paid out 78% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Chunghwa Telecom fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're not enthused to see that Chunghwa Telecom's earnings per share have remained effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Chunghwa Telecom has lifted its dividend by approximately 7.1% a year on average.

Final Takeaway

Is Chunghwa Telecom worth buying for its dividend? The company has not generated any growth in earnings per share over the 10-year timeframe we measured. Plus, Chunghwa Telecom's paying out a high percentage of its earnings and more than half its cash flow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Chunghwa Telecom.

Although, if you're still interested in Chunghwa Telecom and want to know more, you'll find it very useful to know what risks this stock faces. Every company has risks, and we've spotted 1 warning sign for Chunghwa Telecom you should know about.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com