Could Sunplus Technology Company Limited (TPE:2401) 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.
While Sunplus Technology’s 1.3% dividend yield is not the highest, we think its lengthy payment history is quite interesting. That said, the recent jump in the share price will make Sunplus Technology’s dividend yield look smaller, even though the company prospects could be improving. Some simple analysis can reduce the risk of holding Sunplus Technology for its dividend, and we’ll focus on the most important aspects below.
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. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. Sunplus Technology paid out 133% of its profit as dividends, over the trailing twelve month period. 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. The company paid out 53% of its free cash flow, which is not bad per se, but does start to limit the amount of cash Sunplus Technology 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 Sunplus Technology 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.
While the above analysis focuses on dividends relative to a company’s earnings, we do note Sunplus 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 Sunplus Technology’s latest financial position, by checking our visualisation of its financial health.
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. Sunplus 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. Its dividend payments have declined on at least one occasion over the past 10 years. During the past 10-year period, the first annual payment was NT$0.8 in 2011, compared to NT$0.3 last year. This works out to be a decline of approximately 9.3% per year over that time. Sunplus Technology’s dividend has been cut sharply at least once, so it hasn’t fallen by 9.3% every year, but this is a decent approximation of the long term change.
A shrinking dividend over a 10-year period is not ideal, and we’d be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.
Dividend Growth Potential
With a relatively unstable dividend, and a poor history of shrinking dividends, it’s even more important to see if EPS are growing. Over the past five years, it looks as though Sunplus Technology’s EPS have declined at around 24% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Sunplus Technology’s earnings per share, which support the dividend, have been anything but stable.
To summarise, shareholders should always check that Sunplus Technology’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 Sunplus Technology’s dividend has been cut at least once in the past, which is disappointing. In this analysis, Sunplus Technology doesn’t shape up too well as a dividend stock. We’d find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we’ve identified 2 warning signs for Sunplus Technology (1 is significant!) that you should be aware of before investing.
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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