Kina Securities Limited (ASX:KSL) Is Yielding 9.5% - But Is It A Buy?

Today we'll take a closer look at Kina Securities Limited (ASX:KSL) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

With a goodly-sized dividend yield despite a relatively short payment history, investors might be wondering if Kina Securities is a new dividend aristocrat in the making. It sure looks interesting on these metrics - but there's always more to the story. Some simple research can reduce the risk of buying Kina Securities for its dividend - read on to learn more.

Click the interactive chart for our full dividend analysis

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Kina Securities paid out 72% of its profit as dividends, over the trailing twelve month period. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.

Remember, you can always get a snapshot of Kina Securities' latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Kina Securities has been paying a dividend for the past five years. During the past five-year period, the first annual payment was K0.07 in 2016, compared to K0.3 last year. Dividends per share have grown at approximately 29% per year over this time. The dividends haven't grown at precisely 29% every year, but this is a useful way to average out the historical rate of growth.

Kina Securities has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, but it might be worth considering if the business has turned a corner.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It's good to see Kina Securities has been growing its earnings per share at 55% a year over the past five years. With recent, rapid earnings per share growth and a payout ratio of 72%, this business looks like an interesting prospect if earnings are reinvested effectively.

We'd also point out that Kina Securities issued a meaningful number of new shares in the past year. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Kina Securities' payout ratio is within normal bounds. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. In summary, we're unenthused by Kina Securities as a dividend stock. It's not that we think it is a bad company; it simply falls short of our criteria in some key areas.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Just as an example, we've come accross 3 warning signs for Kina Securities you should be aware of, and 2 of them are a bit unpleasant.

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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