Today we will join Chi Hua Fitness Co., Ltd. (GTSM: 1593) take a closer look from the perspective of a dividend investor. Having a strong business and reinvesting the dividends is widely seen as an attractive way to grow your wealth. On the other hand, it has been known that investors buy a stock for its returns and then lose money if the company’s dividend doesn’t meet expectations.
A high yield and a long history of dividend payment are an attractive combination for Chi Hua Fitness. It would be no surprise to discover that many investors are buying it for dividends. Keep in mind, however, that Chi Hua Fitness’ return will be lower due to the recent surge in its share price, although the market may now consider an improvement in its long-term outlook. Whenever you buy stocks for their dividends, be sure to go through the following tests to see if the dividend looks sustainable.
Explore this interactive chart for our latest analysis on Chi Hua Fitness!
GTSM: 1593 Historic dividend March 11, 2021
GTSM: 1593 Historic dividend March 11, 2021Payout percentages
Dividends are usually paid out of company profits. When a company pays more than it makes, dividends can become unsustainable – hardly an ideal situation. Comparing dividend payments to a company’s net income after tax is an easy way to see if a dividend is sustainable. If we look at the data, we can see that 82% of Chi Hua Fitness’s profits have been paid as dividends over the past 12 months. Paying out much of its earnings limits the amount that can be reinvested in the business. This may indicate an obligation to pay a dividend or a lack of investment opportunities.
Another important check is to determine if the free cash flow generated is enough to pay the dividend. With a cash payout ratio of 113%, the dividend payments from Chi Hua Fitness are insufficiently covered by cash flow. Chi Hua Fitness paid fewer dividends than it posted profits, but unfortunately did not generate enough free cash flow to cover the dividend. Cash is king, as they say, and if Chi Hua Fitness repeatedly paid dividends that are not well covered by cash flow, we would consider it a warning sign.
With a strong net cash balance, Chi Hua Fitness investors hardly need to worry in the short term from a dividend perspective.
We update our Chi Hua Fitness data every 24 hours so you can always get our latest Chi Hua Fitness financial health analysis here.
Dividend volatility
One of the biggest risks of relying on dividend income is a company’s potential to struggle financially and lower its dividend. Not only will your income be reduced, but the value of your investment will decrease – nasty. For the purposes of this article, we’re only examining the past decade of Chi Hua Fitness dividend payments. Historically, the dividend has been cut at least once. For the past 10 years, the first annual payment in 2011 was NT $ 1.8, compared to NT $ 3.2 the previous year. The dividend per share rose by approximately 6.0% per year during this period. Chi Hua Fitness dividend payments fluctuate so they haven’t increased 6.0% every year, but the CAGR is a useful rule of thumb to approximate historical growth.
It’s good to see the dividend growing appropriately, but the dividend has been cut at least once in the past. Chi Hua Fitness may have put his house in order since then, but we’re remaining cautious.
Dividend growth potential
Given that the dividend has been cut in the past, we need to consider whether earnings will rise and whether that could lead to higher dividends in the future. Chi Hua Fitness has increased its earnings per share by 8.7% per year over the past five years. Earnings growth in the past has been decent, but unless this is one of the rare companies that can grow without additional capital investments or marketing expenses, we would generally expect the higher payout ratio to limit future growth prospects.
Conclusion
When we look at a dividend stock, we need to make a judgment about whether the dividend will rise, whether the company can hold it in a wide variety of economic circumstances, and whether the dividend payout is sustainable. Chi Hua Fitness is getting a pass for its dividend payout ratio, but has paid out virtually all of its cash flow as dividends. This may only be a one-off, but we’d keep that in mind. Earnings growth was good next, but unfortunately the dividend has been cut at least once in the past. While we’re not very bearish, overall we think there are potentially better dividend stocks out there than Chi Hua Fitness.
Investors generally tend to prefer companies with a consistent, stable dividend policy over companies with an erratic dividend policy. Despite the importance of dividend payments, these aren’t the only factors our readers should be aware of when evaluating a company. We have taken the debate a little further 3 warning signs for Chi Hua Fitness that investors need to be aware that they are moving forward.
If you’re a dividend investor, you should also check out our curated list of dividend stocks that deliver over 3% returns.
Funded
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This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. We want to provide you with a long-term, focused analysis based on fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.
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