Here's Why We're Wary Of Buying Hyundai Elevator's (KRX:017800) For Its Upcoming Dividend

Hyundai Elevator Co., Ltd (KRX:017800) stock is about to trade ex-dividend in four days. The ex-dividend date is commonly two business days before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. Thus, you can purchase Hyundai Elevator's shares before the 29th of August in order to receive the dividend, which the company will pay on the 1st of January.

The company's next dividend payment will be ₩1000.00 per share. Last year, in total, the company distributed ₩5,500 to shareholders. Based on the last year's worth of payments, Hyundai Elevator stock has a trailing yield of around 7.0% on the current share price of ₩79100.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

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Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year, Hyundai Elevator paid out 95% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the past year it paid out 196% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Cash is slightly more important than profit from a dividend perspective, but given Hyundai Elevator's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

See our latest analysis for Hyundai Elevator

Click here to see how much of its profit Hyundai Elevator paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's comforting to see Hyundai Elevator's earnings have been skyrocketing, up 37% per annum for the past five years. Earnings per share are increasing at a rapid rate, but the company is paying out more than we are comfortable with, based on current earnings. Fast-growing businesses normally need to reinvest most of their earnings in order to maintain growth, so we'd suspect that either earnings growth will slow or the dividend may not be increased for a while.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past six years, Hyundai Elevator has increased its dividend at approximately 45% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

Final Takeaway

From a dividend perspective, should investors buy or avoid Hyundai Elevator? While it's nice to see earnings per share growing, we're curious about how Hyundai Elevator intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Hyundai Elevator.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Hyundai Elevator. Case in point: We've spotted 1 warning sign for Hyundai Elevator you should be aware of.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.