Should You Buy Daelim Trading Co., Ltd. (KRX:006570) For Its 3.5% Dividend?

Today we'll take a closer look at Daelim Trading Co., Ltd. (KRX:006570) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

In this case, Daelim Trading likely looks attractive to investors, given its 3.5% dividend yield and a payment history of over ten years. It would not be a surprise to discover that many investors buy it for the dividends. During the year, the company also conducted a buyback equivalent to around 0.6% of its market capitalisation. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Click the interactive chart for our full dividend analysis

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 Daelim Trading pays a dividend, it reported a loss over the last year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Daelim Trading paid out a conservative 31% of its free cash flow as dividends last year.

Consider getting our latest analysis on Daelim Trading's financial position here.

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 Daelim Trading's dividend payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was ₩200 in 2010, compared to ₩140 last year. The dividend has shrunk at around 3.5% a year during that period. Daelim Trading's dividend hasn't shrunk linearly at 3.5% per annum, but the CAGR is a useful estimate of the historical rate of change.

A shrinking dividend over a 10-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Over the past five years, it looks as though Daelim Trading's EPS have declined at around 42% a year. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We're a bit uncomfortable with the company paying a dividend while being loss-making, although at least the dividend was covered by free cash flow. Earnings per share are down, and Daelim Trading's dividend has been cut at least once in the past, which is disappointing. In summary, Daelim Trading has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Case in point: We've spotted 3 warning signs for Daelim Trading (of which 1 is concerning!) 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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