Interest rates in Taiwan have been falling over the past year as the central bank tried to kick start investments and growth in the economy. The Taiwan GDP shrunk by 0.8% in the first quarter (YoY), which would make it the only economy in Asia with negative growth in the period. With interest rates down at 1.5%, high and stable dividend paying companies with strong earnings begin to look more attractive. With that in mind we ran a screen for high dividend payers in Taiwan, those with strong sources of earnings which are likely to sustain those dividends.
Interest rates in Taiwan
Source: Thomson Reuters Eikon/StarMine
Screening criteria
We screened for companies in Taiwan with over $1 billion dollars in market capitalization. We then screened for companies with StarMine Earnings Quality scores of over 80, to ensure we got companies that have earnings coming from sustainable sources. We also incorporated our value and momentum factors into the screen by taking companies in the top quintile of our Value-Momentum (Val-Mo) model. Finally we eliminated companies that had a score of less than 30 on our Combined Credit Risk (CCR) model to ensure that the companies have strong financials. Below are the nine companies that come through our screens and are all good candidates to analyze. We’ll focus on Lite-On Technology Corp. (2301.TW), which has a healthy 5.4% dividend yield. It makes power supplies, consumer electronics and optoelectronic products.
Source: Thomson Reuters Eikon/StarMine
Bright scores
As you can see below, the company scores highly on almost every StarMine model, be it a valuation model, a momentum model or one that measures earnings quality. Flush with cash on the balance sheet to the tune of over 62 billion Taiwan dollars, and no significant debt, the company does well on the credit models too.
Source: Thomson Reuters Eikon/StarMine
Glowing cash flow
When we look at sustainability of dividends, we first take a look at cash flows. Lite-On Technology has generated strong positive cash flows from operations in each of the last three quarters, exceeding net income. When earnings are backed by strong cash flows, they tend to be more sustainable in the long term. That combined with the strong balance sheet is an indicator that the dividend is likely to remain strong.
We also take a look at the return on net operating assets, which indicates how efficiently the company is operating its assets. After a decline for many years, the last year has seen RNOA increase by 5 percentage points. That is impressive, given that the rest of the industry has remained flat in the same period by this measure. One reason for the impressive performance over the past year is improving margins. Trailing 4Q operating margins have improved over the last year as the company had a favorable product mix, with increasing sales in higher margin products. Lite-On Technology also made moves to cut costs given the falling margins over the past few years, and that has helped margins in the last year. The company seems well positioned to take advantage of this in the coming year.
Source: Thomson Reuters Eikon/StarMine
Lighting up the valuation model
The company also appears to be inexpensive according to the StarMine Relative Valuation model. One reason for that is that the company trades at an enterprise value/sales ratio of just 0.3, compared to its 5 year median of 0.5. The strong dividend yield also helps. Analysts have been bullish on earnings prospects for Lite-On Technology as they have raised both quarterly and annual earnings estimates for the company. The company handily beat analyst expectations in the last quarter, and that has built up even more positive analyst revisions momentum. Since the beginning of May, every one of the 11 analysts that have updated full year estimates has taken them higher.
Seventy percent of the company’s revenues come from Asia, with China accounting for a large portion of that. The finance minister in Taiwan has encouraged companies in the country to look for revenue streams outside of China to cushion them from any major slowdown in the region. Encouragingly, 30% of revenues come from outside of Asia, and that could continue to be a growth driver for Lite-On Technology, as it looks to diversify its revenue streams. In the mean time, the strong dividend yield looks like it may be sustainable in this low interest rate environment. Looks like the company is shining a light on favorable results.
