Is Taiwan High Speed Rail Corporation (TPE:2633) An Attractive Dividend Stock?

Could Taiwan High Speed Rail Corporation (TPE:2633) 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. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

With a five-year payment history and a 4.0% yield, many investors probably find Taiwan High Speed Rail intriguing. We'd agree the yield does look enticing. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

Click the interactive chart for our full dividend analysis

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, 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. Looking at the data, we can see that 117% of Taiwan High Speed Rail's profits were paid out as dividends in the last 12 months. 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. Last year, Taiwan High Speed Rail paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

Remember, you can always get a snapshot of Taiwan High Speed Rail's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Taiwan High Speed Rail has been paying a dividend for the past five years. During the past five-year period, the first annual payment was NT$0.7 in 2016, compared to NT$1.2 last year. This works out to be a compound annual growth rate (CAGR) of approximately 13% a year over that time.

Taiwan High Speed Rail has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Taiwan High Speed Rail's earnings per share have shrunk at 32% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Taiwan High Speed Rail'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. We're a bit uncomfortable with Taiwan High Speed Rail paying out a high percentage of both its cashflow and earnings. Earnings per share are down, and to our mind Taiwan High Speed Rail has not been paying a dividend long enough to demonstrate its resilience across economic cycles. Using these criteria, Taiwan High Speed Rail looks quite suboptimal from a dividend investment perspective.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Taiwan High Speed Rail has 2 warning signs (and 1 which can't be ignored) we think you should know about.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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