Today we’ll take a closer look at Jochu Technology Co., Ltd. (TPE:3543) from a dividend investor’s perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. 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.
A 2.8% yield is nothing to get excited about, but investors probably think the long payment history suggests Jochu Technology has some staying power. Remember though, due to the recent spike in its share price, Jochu Technology’s yield will look lower, even though the market may now be factoring in an improvement in its long-term prospects. Some simple analysis can reduce the risk of holding Jochu Technology for its dividend, and we’ll focus on the most important aspects below.
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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. Although Jochu Technology pays a dividend, it was loss-making during the past year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.
Jochu Technology’s cash payout ratio in the last year was 29%, which suggests dividends were well covered by cash generated by the business.
While the above analysis focuses on dividends relative to a company’s earnings, we do note Jochu Technology’s strong net cash position, which will let it pay larger dividends for a time, should it choose.
Remember, you can always get a snapshot of Jochu Technology’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. Jochu Technology has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was NT$4.5 in 2011, compared to NT$0.8 last year. The dividend has fallen 82% over that period.
When a company’s per-share dividend falls we question if this reflects poorly on either external business conditions, or the company’s capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.
Dividend Growth Potential
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Jochu Technology’s earnings per share have shrunk at 31% 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 Jochu Technology’s earnings per share, which support the dividend, have been anything but stable.
We’d also point out that Jochu Technology issued a meaningful number of new shares in the past year. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus – perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.
Conclusion
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We’re a bit uncomfortable with the company paying a dividend while being loss-making, although at least the dividend was covered by free cash flow. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In summary, Jochu Technology has a number of shortcomings that we’d find it hard to get past. Things could change, but we think there are a number of better ideas out there.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. To that end, Jochu Technology has 6 warning signs (and 2 which are a bit unpleasant) we think you should know about.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding 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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