Why It Might Not Make Sense To Buy Taiwan Mobile Co., Ltd. (TWSE:3045) For Its Upcoming Dividend

Taiwan Mobile Co., Ltd. (TWSE:3045) stock is about to trade ex-dividend in 4 days. 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Thus, you can purchase Taiwan Mobile's shares before the 8th of July in order to receive the dividend, which the company will pay on the 31st of July.

The company's next dividend payment will be NT$4.30 per share, and in the last 12 months, the company paid a total of NT$4.30 per share. Last year's total dividend payments show that Taiwan Mobile has a trailing yield of 3.8% on the current share price of NT$112.50. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Taiwan Mobile

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year Taiwan Mobile paid out 99% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether Taiwan Mobile generated enough free cash flow to afford its dividend. Over the last year it paid out 55% of its free cash flow as dividends, within the usual range for most companies.

It's good to see that while Taiwan Mobile's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. So we're not too excited that Taiwan Mobile's earnings are down 3.7% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Taiwan Mobile has seen its dividend decline 2.6% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

Final Takeaway

Is Taiwan Mobile worth buying for its dividend? It's never fun to see a company's earnings per share in retreat. What's more, Taiwan Mobile is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

So if you're still interested in Taiwan Mobile despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example - Taiwan Mobile has 3 warning signs we think you should be aware of.

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