Don’t rush to buy FSP Technology Inc. (TWSE:3015) just because it’s going ex-dividend

Readers who want to buy FSP Technology Inc. (TWSE:3015) to get its dividends will need to act soon, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before the company’s record date, which is the date the company determines which shareholders are entitled to receive a dividend. It is important to be aware of the ex-dividend date because any trades in the shares must have been settled on or before the record date. Therefore, FSP Technology investors who purchase shares from June 20th will not receive the dividend, which will be paid on July 10th.

The company’s next dividend payment will be NT$3.20 per share, following last year when the company paid a total of NT$3.20 to shareholders. Last year’s total dividend payments show that FSP Technology has a trailing yield of 4.8% on the current share price of NT$67.00. Dividends are a major contributor to investment returns for long-term holders, but only if the dividend continues to be paid. Therefore, we need to investigate whether FSP Technology can pay its dividends and whether the dividends could grow.

See our latest analysis for FSP Technology

Dividends are normally paid out of the company’s income, so if a company pays out more than it earned, its dividend is normally at greater risk of being cut. Last year, FSP Technology distributed 95% of its profits as dividends to shareholders, suggesting that the dividends are not well covered by profits. A useful secondary check might be to assess whether FSP Technology generated enough free cash flow to pay its dividend. Over the last year, it paid out 147% of its free cash flow as dividends, which is uncomfortably high. We’re curious why the company paid out more cash than it generated last year, as this could be one of the first signs that a dividend might be unsustainable.

FSP Technology has a large net cash position on the balance sheet, which could fund large dividends for a while if the company so desired. Still, smart investors know that it’s best to evaluate dividends in relation to the cash and profit generated by the business. Paying cash dividends on the balance sheet is not sustainable in the long term.

Cash is slightly more important than profit from a dividend perspective, but given FSP Technology’s payments weren’t well covered by profits or cash flow, we’d be concerned about the sustainability of this dividend.

Click here to see how much of its profit FSP Technology paid out over the last 12 months.

Have earnings and dividends increased?

Stocks in companies that generate sustainable earnings growth often have the best dividend prospects, as it is easier to increase dividends when profits are rising. If profits fall enough, the company could be forced to cut its dividend. It’s encouraging to see that FSP Technology’s profits have increased rapidly, 53% per year over the past five years. FSP Technology’s dividends were not well covered by profits, although at least its earnings per share are growing quickly. Generally, when a company is growing so quickly and paying out all of its profits as dividends, it can suggest that the company is borrowing heavily to finance its growth, or that earnings growth is likely to slow due to a lack of reinvestment. .

Many investors will evaluate a company’s dividend performance by evaluating how much the dividend payments have changed over time. Over the past 10 years, FSP Technology has increased its dividends by approximately 5.9% per year on average. Earnings per share have been growing much faster than dividends, potentially because FSP Technology is retaining more of its profits to grow the business.

Final conclusion

Is FSP technology worth buying for its dividends? Earnings per share have been growing, despite the company paying out a worryingly high percentage of its profits and cash flow. We struggle to see how a company that pays out such a large portion of its profits and cash flow will be able to sustain its dividends in a recession, or reinvest enough in its business to continue growing profits without taking out large loans. It’s not an attractive combination from a dividend perspective and we’re inclined to reject it for now.

With that in mind, if FSP Technology’s low dividend characteristics don’t bother you, it’s worth being aware of the risks involved in this business. Every company has risks, and we identify 1 warning sign for FSP Technology you should know.

Generally, we don’t recommend just buying the first dividend stocks you see. Here it is a curated list of interesting stocks that are strong dividend payers.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St has no position in any of the stocks mentioned.

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