Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Integrated Service Technology Inc. (GTSM:3289) is about to go ex-dividend in just 3 days. You will need to purchase shares before the 9th of April to receive the dividend, which will be paid on the 27th of May.
Integrated Service Technology’s upcoming dividend is NT$1.00 a share, following on from the last 12 months, when the company distributed a total of NT$2.50 per share to shareholders. Based on the last year’s worth of payments, Integrated Service Technology has a trailing yield of 5.9% on the current stock price of NT$52.5. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Integrated Service Technology paid out a disturbingly high 255% of its profit as dividends last year, which makes us concerned there’s something we don’t fully understand in the business. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Luckily it paid out just 24% of its free cash flow last year.
It’s disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Integrated Service 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.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we’re discomforted by Integrated Service Technology’s 30% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
We’d also point out that Integrated Service Technology issued a meaningful number of new shares in the past year. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus – perpetually pushing a boulder uphill.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Integrated Service Technology has lifted its dividend by approximately 23% a year on average. That’s intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Integrated Service Technology is already paying out 255% of its profits, and with shrinking earnings we think it’s unlikely that this dividend will grow quickly in the future.
The Bottom Line
Is Integrated Service Technology an attractive dividend stock, or better left on the shelf? It’s not a great combination to see a company with earnings in decline and paying out 255% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Integrated Service Technology’s cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Bottom line: Integrated Service Technology has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
Although, if you’re still interested in Integrated Service Technology and want to know more, you’ll find it very useful to know what risks this stock faces. Our analysis shows 4 warning signs for Integrated Service Technology that we strongly recommend you have a look at before investing in the company.
We wouldn’t recommend just buying the first dividend stock you see, though. Here’s a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
When trading Integrated Service Technology or any other investment, use the platform considered by many to be the Professional’s Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.