Is Hwacheon Machine Tool Co. Ltd's (KRX:000850) 3.9% Dividend Worth Your Time?

Is Hwacheon Machine Tool Co. Ltd (KRX:000850) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

In this case, Hwacheon Machine Tool likely looks attractive to investors, given its 3.9% dividend yield and a payment history of over ten years. We'd guess that plenty of investors have purchased it for the income. Some simple research can reduce the risk of buying Hwacheon Machine Tool for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Hwacheon Machine Tool!

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, 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. In the last year, Hwacheon Machine Tool paid out 111% of its profit as dividends. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Hwacheon Machine Tool paid out a conservative 27% of its free cash flow as dividends last year. It's good to see that while Hwacheon Machine Tool's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

While the above analysis focuses on dividends relative to a company's earnings, we do note Hwacheon Machine Tool's strong net cash position, which will let it pay larger dividends for a time, should it choose.

Remember, you can always get a snapshot of Hwacheon Machine Tool's 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. For the purpose of this article, we only scrutinise the last decade of Hwacheon Machine Tool's dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past 10-year period, the first annual payment was ₩858 in 2011, compared to ₩1.3k last year. This works out to be a compound annual growth rate (CAGR) of approximately 3.8% a year over that time.

Slow and steady dividend growth might not sound that exciting, but dividends have been stable for ten years, which we think is seriously impressive.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Hwacheon Machine Tool's earnings per share have shrunk at 35% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Hwacheon Machine Tool's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Hwacheon Machine Tool'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 not keen on the fact that Hwacheon Machine Tool paid out such a high percentage of its income, although its cashflow is in better shape. Second, earnings per share have actually shrunk, but at least the dividends have been relatively stable. Ultimately, Hwacheon Machine Tool comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Hwacheon Machine Tool has 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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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