Chien Shing Harbour Service Co.,Ltd. (TPE:8367) Is Yielding 4.0% - But Is It A Buy?

Could Chien Shing Harbour Service Co.,Ltd. (TPE:8367) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

Chien Shing Harbour ServiceLtd pays a 4.0% dividend yield, and has been paying dividends for the past three years. It's certainly an attractive yield, but readers are likely curious about its staying power. 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 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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Chien Shing Harbour ServiceLtd paid out 43% of its profit as dividends, over the trailing twelve month period. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. The company paid out 64% of its free cash flow, which is not bad per se, but does start to limit the amount of cash Chien Shing Harbour ServiceLtd has available to meet other needs. It's positive to see that Chien Shing Harbour ServiceLtd's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Remember, you can always get a snapshot of Chien Shing Harbour ServiceLtd's latest financial position, by checking our visualisation of its financial health.

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 dividend has not fluctuated much, but with a relatively short payment history, we can't be sure this is sustainable across a full market cycle. During the past three-year period, the first annual payment was NT$1.0 in 2017, compared to NT$1.1 last year. This works out to be a compound annual growth rate (CAGR) of approximately 3.2% a year over that time.

It's good to see at least some dividend growth. Yet with a relatively short dividend paying history, we wouldn't want to depend on this dividend too heavily.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Chien Shing Harbour ServiceLtd has grown its earnings per share at 18% per annum over the past five years. Earnings per share have been growing at a good rate, and the company is paying less than half its earnings as dividends. We generally think this is an attractive combination, as it permits further reinvestment in the business.

Conclusion

To summarise, shareholders should always check that Chien Shing Harbour ServiceLtd's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Above all, we're glad to see that Chien Shing Harbour ServiceLtd pays out a low fraction of its earnings and, while it paid a higher percentage of cashflow, this also was within a normal range. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we'd like. Chien Shing Harbour ServiceLtd has a number of positive attributes, but it falls slightly short of our (admittedly high) standards. Were there evidence of a strong moat or an attractive valuation, it could still be well worth a look.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Just as an example, we've come accross 4 warning signs for Chien Shing Harbour ServiceLtd you should be aware of, and 1 of them makes us a bit uncomfortable.

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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