Dividend paying stocks like Lih Tai Construction Enterprise Co., Ltd. (GTSM:5520) 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. 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 high yield and a long history of paying dividends is an appealing combination for Lih Tai Construction Enterprise. We’d guess that plenty of investors have purchased it for the income. During the year, the company also conducted a buyback equivalent to around 3.8% of its market capitalisation. Some simple analysis can reduce the risk of holding Lih Tai Construction Enterprise 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. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Lih Tai Construction Enterprise paid out 44% of its profit as dividends, over the trailing twelve month period. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Plus, there is room to increase the payout ratio over time.
We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. Lih Tai Construction Enterprise paid out a conservative 48% of its free cash flow as dividends last year. It’s positive to see that Lih Tai Construction Enterprise’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.
With a strong net cash balance, Lih Tai Construction Enterprise investors may not have much to worry about in the near term from a dividend perspective.
Consider getting our latest analysis on Lih Tai Construction Enterprise’s financial position here.
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. Lih Tai Construction Enterprise has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was NT$1.8 in 2010, compared…
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