Dividend paying stocks like Quang Viet Enterprise Co., Ltd. (TPE:4438) tend to be popular with investors, and for good reason – some research suggests a significant amount of all stock market returns come from reinvested dividends. Unfortunately, it’s common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
In this case, Quang Viet Enterprise likely looks attractive to dividend investors, given its 7.2% dividend yield and five-year payment history. It sure looks interesting on these metrics – but there’s always more to the story. There are a few simple ways to reduce the risks of buying Quang Viet Enterprise for its dividend, and we’ll go through these below.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, 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. In the last year, Quang Viet Enterprise paid out 161% of its profit as dividends. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. The company paid out 57% of its free cash flow, which is not bad per se, but does start to limit the amount of cash Quang Viet Enterprise has available to meet other needs. It’s disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Quang Viet Enterprise fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we’d view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Remember, you can always get a snapshot of Quang Viet Enterprise’s latest financial position, by checking our visualisation of its financial health.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Looking at the data, we can see that Quang Viet Enterprise has been paying a dividend for the past five years. During the past five-year period, the first annual payment was NT$7.2 in 2016, compared to NT$7.5 last year. Its dividends have grown at less than 1% per annum over this time frame.
It’s good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth, anyway. We’re not that enthused by this.
Dividend Growth Potential
With a relatively unstable dividend, it’s even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there’s a good chance of bigger dividends in future? Quang Viet Enterprise’s earnings per share have shrunk at 20% 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 Quang Viet Enterprise’s earnings per share, which support the dividend, have been anything but stable.
To summarise, shareholders should always check that Quang Viet Enterprise’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We’re a bit uncomfortable with its high payout ratio, although at least the dividend was covered by free cash flow. Earnings per share are down, and Quang Viet Enterprise’s dividend has been cut at least once in the past, which is disappointing. There are a few too many issues for us to get comfortable with Quang Viet Enterprise from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. For instance, we’ve picked out 3 warning signs for Quang Viet Enterprise that investors should take into consideration.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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