Something To Consider Before Buying KG Intelligence CO., LTD. (TYO:2408) For The 3.0% Dividend

Dividend paying stocks like KG Intelligence CO., LTD. (TYO:2408) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

A slim 3.0% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, KG Intelligence could have potential. Some simple research can reduce the risk of buying KG Intelligence for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on KG Intelligence!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. While KG Intelligence pays a dividend, it reported a loss over the last year. When a company recently reported a loss, we should investigate if its cash flows covered the dividend.

Last year, KG Intelligence paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

With a strong net cash balance, KG Intelligence investors may not have much to worry about in the near term from a dividend perspective.

We update our data on KG Intelligence every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. KG Intelligence has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having been cut one or more times over this time. Its most recent annual dividend was JP¥10.0 per share, effectively flat on its first payment 10 years ago.

We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments, we don't think this is an attractive combination.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Over the past five years, it looks as though KG Intelligence's EPS have declined at around 62% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and KG Intelligence's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that KG Intelligence's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're a bit uncomfortable with KG Intelligence paying a dividend while loss-making, especially since the dividend was also not well covered by free cash flow. Earnings per share are down, and KG Intelligence's dividend has been cut at least once in the past, which is disappointing. Using these criteria, KG Intelligence looks quite suboptimal from a dividend investment perspective.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, KG Intelligence has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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